ADVANCED ACCOUNTING

B.Com. SECOND YEAR

Semester – 3

Lesson Writers

Dr. R. Jaya Prakash Reddy, Dr. Ch. Suravinda,

M.Com., Ph.D. M.Com, Ph.D., LLB.
Reader in Commerce, Reader,
SGHR & MCMR College, Dept. of Commerce,
Guntur. Hindu College, Guntur.

Dr. T. Nageswara Rao

M.Com., Ph.D.
Principal (Retd.),
Hindu College, Guntur.

Editor
Prof. V. Chandra Sekhara Rao
M.Com., Ph.D.
Dept. of Commerce & Business Administration,
Acharya Nagarjuna University.
Nagarjuna Nagar 522 510,
GUNTUR

Director
Dr. NAGARAJU BATTU
MBA, MHRM, LLM, M.Sc.(Psy), M.A.(Soc), M.Ed., M.Phil., Ph.D.
Centre for Distance Education,
Acharya Nagarjuna University,
Nagarjuna Nagar 522 510, GUNTUR.

Ph : 0863 - 2346208, 2346222, 2346259 ( Study Material)

Website : www.anucde.info
e-mail : anucdedirector@gmail.com
B.Com . SECOND YEAR : Semester - 3
ADVANCED ACCOUNTING
First Edition : 2023

No. of Copies :

© Acharya Nagarjuna University

This book is exclusively prepared for the use of students of B.Com. programme,
Centre for Distance Education, Acharya Nagarjuna University and this book is meant for
limited circulation only.

Published by :
Dr. Nagaraju Battu
Director,
Centre for Distance Education,
Acharya Nagarjuna University.

Printed at :
 FOREWORD
Since its establishment in 1976, Acharya Nagarjuna University has been forging
ahead in the path of progress and dynamism, offering a variety of courses and research
contributions. I am extremely happy that by gaining a ‘A’ Grade from the NAAC in the year
2014, the Acharya Nagarjuna University is offering educational opportunities at the UG, PG
levels apart from research degrees to students from over 285 affiliated colleges spread over the
two districts of Guntur and Prakasam.

The University has also started the Centre for Distance Education with the aim to
bring higher education within reach of all. The centre will be a great help to those who cannot
join in colleges, those who cannot afford the exorbitant fees as regular students, and even
housewives desirous of pursuing higher studies. With the goal of bringing education in the door
step of all such people. Acharya Nagarjuna University has started offering B.A, and B, Com
courses at the Degree level and M.A, M.Com., L.L.M., courses at the PG level from the
academic year 2021-22 on the basis of Semester system.

To facilitate easier understanding by students studying through the distance mode,

these self-instruction materials have been prepared by eminent and experienced teachers. The
lessons have been drafted with great care and expertise in the stipulated time by these teachers.
Constructive ideas and scholarly suggestions are welcome from students and teachers invited
respectively. Such ideas will be incorporated for the greater efficacy of this distance mode of
education. For clarification of doubts and feedback, weekly classes and contact classes will be
arranged at the UG and PG levels respectively.

It is aim that students getting higher education through the Centre for Distance
Education should improve their qualification, have better employment opportunities and in turn
facilitate the country’s progress. It is my fond desire that in the years to come, the Centre for
Distance Education will go from strength to strength in the form of new courses and by catering
to larger number of people. My congratulations to all the Directors, Coordinators, Editors and
Lesson -writers of the Centre who have helped in these endeavours.

Prof. P.Rajasekhar
Vice –Chancellor,
Acharya Nagarjuna University
 PROGRAMME : THREE – YEAR B.Com
(General & Computer Applications)

Domain Subject : Commerce

Semester – wise Syllabus under CBCS
(w.e.f. 2020 – 21 Admitted Batch)

II Year B.Com(Gen. & CA) : Semester – III

306 BCO 21 – Course 3A : Advanced Accounting

Learning Outcomes :

At the end of the course the student will be able to :

 Understand the concept of Non-profit organisations and its accounting process
 Comprehend the concept of single – entry system and preparation of statement of affairs.
 Familiarize with the legal formalities at the time of dissolution of the firm
 Prepare financial statements for partnership firm on dissolution of the firm
 Employ critical thinking skills to understand the difference between the dissolution of the
firm and dissolution of partnership.

Syllabus :
Unit – 1 : Accounting for Non-Profit Organisations :
Non Profit Entities – Meaning – Features of Non Profit Entities – Provisions as per section
Sec 8 – Preparation of Accounting Records – Receipts and Payments Account – Income and
Expenditure Account – Preparation of Balance Sheet (including problems).

Unit – 2 : Single Entry System :

Features – Difference between Single Entry and Double Entry – Disadvantages of Single
Entry – Ascertainment of Profit and Preparation of Statement of Affairs (including
problems).

Unit – 3 : Hire Purchase System :

Features – Difference between Hire Purchase and Instalment Purchase systems – Accounting
treatment in the books of Hire Purchaser and Hire Vendor – Default and Repossession
(including problems).
Unit – 4 : Partnership Accounts – 1 :

Meaning – Partnership Deed – Fixed and Fluctuating capitals – Accounting Treatment of

Goodwill – Admission and Retirement of a Partner (including problems).

Unit – 5 : Partnership Accounts – 2 :

Dissolution of a Partnership Firm – Application of Garner Vs .Murray rule in India –
Insolvency of one or more Partners (including problems).

References :
1. Advanced Accountancy : T.S. Reddy and A. Murthy by Margham Publications.
2. Financial Accounting : SN Maheswari & SK Maheswari by Vikas Publications.
3. Principles and Practice of Accounting : RL Gupta VK Gupta, Sultan Chand & Sons.
4. Advanced Accountancy : R.L.Gupta & Radhaswamy, Sultan Chand & Sons.
5. Advanced Accountancy (Vol - II) : SN Maheswari & VL Maheswari by Vikas
Publishers.
6. Advanced Accountancy : Dr. G. Yogeswaran & Julia Allen, PBP Publications.
7. Accountancy – III : Tulasian, Tata Mc.Graw Hill Co.
8. Accountancy – III : S.P. Jain & K.L. Narang, Kalyani Publishers.
9. Advanced Accounting (IPCC) : D.G. Sharma, Tax Mann Publications.
10. Advanced Accounting : Prof. B. Amarnadh, Seven Hills International Publishers.
11. Advanced Accountancy : M. Shrinivas & K. Sivalatha Reddy, Himalaya Publishers.

Suggested Co-Curricular Activities :

 Quiz Programs
 Problem solving Exercises
 Co – operative learning
 Seminar
 Visit a Single Entry Firm, Collect Data and Creation of a Trial Balance of the firm.
 Visit Non-profit Organisation and collect financial statements.
 Critical analysis of rate of interest on hire purchase schemes.
 Visit a partnership firm and collect partnership deed.
 Debate on Garner Vs. Murray rule in India and outside India.
 Group Discussions on problems relating to topics covered by syllabus.
 Examinations (Scheduled and Surprise tests) on all units.
 MODEL QUESTION PAPER
B.Com. – Second Year
Semester - 3
ADVANCED ACCOUNTING
Time: Three hours Max. Marks: 70

SECTION A ( 5 x 4 = 20 Marks)
Answer any FIVE of the following questions.

1. Write any five capital natured expenses.

2. Write difference between Single Entry System and Double Entry System.

3. Explain about statement of affairs.

4. Write the features of Hire Purchase System.

5. Write about the parties in Hire Purchase System.

6. Write the features of Partnership Business.

7. Write about the Revaluation Account.

8. Write about dissolution of Partnership Firm.

SECTION B (5 x 10 = 50 Marks)
Answer the following questions.

9. (a) What about the treatment of important items in non trading accounting.

Or

(b) From the following particulars prepare Income and Expenditure account.

Particulars Rs.

Fees collected (including Rs. 24,000 on account of Last year) 2,24,000

Fees for the year outstanding 40,000
Salary paid (including Rs. 2,400 on account of Last year) 19,200
Salary outstanding 3,200
Entertainment expenses 4,000
 Tournament expenses 8,000
Meeting expenses 16,000
Travelling conveyance 6,400
Purchase of books 16,000
Periodicals 8,000
Rent 9,600
Postage, Telephone, Telegrams 13,600
Printing and Stationary 4,000
Donation received 6,400

10. (a) Write disadvantages (limitations) of Single Entry System.

Or

(b) A trader keeps his books by single entry system method. His position on 31 st
December, 2002 was as follows : cash at bank Rs. 9,000; Stock Rs. 60,000;
Debtors Rs. 90,000; Machinery Rs. 1,50,000 and Creditors RS. 69,000. His
position on 31st December, 2003 as follows : cash at bank Rs. 12,000; Stock
Rs. 75,000; Debtors Rs. 1,35,000; Machinery Rs. 1,35,000 and Creditors RS.
75,000.
During the year the trader introduced Rs. 30,000 as further capital in business
and withdrew Rs. 900 per month. From the above you are required to ascertain
the profit or loss made by the trader for the year ended 31-12-2003.

11. (a) Write the differences between Hire Purchase and Instalment Purchase System.

Or

(b) A railway company purchased wagons on Hire Purchase system over a term of
2 years starting on 1-10-2004. The instalment of Rs. 4,000 each payable half
yearly. The cash price of the wagon is Rs. 14,870 and the wagons company
charges interest at the rate of 6% pa. Books are closed every year on 31 st
December. Write the necessary ledger accounts in the books of Railway
Company. The first instalment is paid on 30.6.2004.
12. (a) ABC shareprofits and losses in the ration of 5 : 3 : 2. They admit D a partner by
giving firm 1/5 share in future profits. He brings Rs. 20,000 as his share of
goodwill and also brings Rs. 50,000 as his capital. Old partner withdraw their
share of goodwill. Draw journal entries.
Or

(b) Achyut and Ananth are partners in a firm sharing profits and losses in the ratio
3:2. On 1.1.2003 the position of the business was as follows :

Liabilities Rs. Assets Rs.

Creditors 15,000 Goodwill 5,000

Capital Accounts : Stock 20,000

Achyut 30,000 Plant 25,000

Ananth 25,000 Debtors 18,000

Cash 2,000

70,000 70,000

Ajith agrees to join the business on the following conditions :

(i) He will introduce Rs. 20,000 as his capital and pay Rs. 10,000 to partners

as premium for goodwill for 1/4th share of future profits of the firm.

(ii) Realuation of assets of the firm will be made by reducing plant to Rs.

20,000 and stock by 10% and by raising a provision for bad debts at 5% of

debtors.

(iii) You are asked to show the balance sheet of the new firm. Goodwill is to

be appear in its old figure in the new balance sheet.

13. (a) Explain the Garner Vs. Murray case and what are the applications of Garner

Vs. Murray in India are.

Or
(b) A, B and C commenced Business on 1.4.2004 with a capital of Rs. 25,000 ,
Rs. 20,000 and Rs. 15,000 respectively. Profits and losses are shared in the
ration of 4:3:3. Capital carried interest @ 5% pa. During the year ended on
31.3.2005 they made a profit of Rs. 12,000 (Before allowing interest on
capitals). Drawings of each partner were Rs. 2,500 per year. On 31.3.2005
the firm was disclosed. Creditors on that date were Rs. 6,000. The assets
realized Rs. 60,000. Give necessary accounts to close the books.

*****
 CONTENTS

Page No.
Unit No. Lesson No. Title of the Lesson
From To

1 Non – Profit Organisations – 1 1.1 - 1.13

Unit - 1
2 Non – Profit Organisations – 2 2.1 - 2.25

3 Single Entry - 1 3.1 - 3.13

Unit - 2
4 Single Entry - 2 4.1 - 4.23

5 Hire Purchase System - 1 5.1 - 5.31

Unit - 3
6 Hire Purchase System - 2 6.1 - 6.15

Partnership Accounts - 1
7 7.1 - 7.27
Admission of a Partner
Unit - 4
Partnership Accounts - 2
8 8.1 - 8.30
Retirement or Death of a Partner
Partnership Accounts - 3
9 9.1 - 9.26
Amalgamation
Partnership Accounts - 4
Unit - 5 10 10.1 - 10.26
Dissolution of a Partnership Firm

Partnership Accounts - 5
11 11.1 - 11.21
Insolvency
 LESSON - 1
NON - PROFIT ORGANISATIONS - I
OBJECTIVES : After going through this lesson the student can know what is a Non trading concern
What are the books maintained by them ? How a Receipt and Payment account and an Income and
Expenditure account is prepared ?

STRUCTURE OF THE LESSON :

1.1 Introduction.
1.2 Capital and Revenue.
1.3 Capital Expenditure.
1.4 Revenue Expenditure
1.5 Revenue Expenditure becoming capital expenditure.
1.6 Usual items of capital expenditure
1.7 Usual items of Revenue expenditure.
1.8 Capital and Revenue Receipts.
1.9 Receipts and Payments Account.
1.10 Income and Expenditure Account.
1.11 Preparation of income and expenditure Account from Receipts and Payment account.
1.12 Summary
1.13 Self Assessment Questions
1.14 Exercises
1.15 Suggested Readings

1.1 INTRODUCTIONS :
The purpose of every trading or manufacturing activity is to make profit. But there are certain
charitable and social institutions which are created not with a profit making object but for the
development of welfare activities, both for the general public and for its members such as educational
institutions, hospitals, clubs, charitable trusts etc. are called non - trading concerns.

These non profitable institution are not interested in the quantum of profits earned by them during
the year but certainly they are interested in knowing the receipts and expenditure during the year and
their financial position at the end of each year. To achieve these objectives they prepare the following
statements.

a. Receipts and payments account.

b. Income and Expenditure account.
c. Balance sheet.
The concepts of capital and revenue are very important in the preparation of Final accounts of
Non -Trading concerns, Therefore let us first know the distinction between capital and revenue items.
 Centre For Distance Education 1.2 Acharya Nagarjuna University

1.2 CAPITAL AND REVENUE :

One of the objects of Accounting is to determine whether the business has earned profit or not.
For this purpose a proper distinction between capital and revenue, as regards expenditure receipts and
losses, is required. Failure or neglect to discriminate capital and Revenue will falsify the whole of the
results of accounting For example, plant may purchased and charged to the purchases account, some of
the fixed assets may be sold and the proceeds may be treated as income. In each case both the profit
and loss account and Balance sheet will be affected while preparing the final accounts, all revenue
items are included in the revenue account i.e. Trading and profit and loss account and all capital items
in the balance sheet. Any error committed in distinguish between “capital” and “Revenue” will effect
the ascertainment of correct profit.

It is very different to give a clear cut rule as to distinguish capital and revenue expenditure.
However, the following rules may serve as a guide for making distinction between capital and revenue
expenditure.

1.3 CAPITAL EXPENDITURE :

Capital expenditure is such an expenditure which benefits the business over a long period. It
includes assets acquired for the purpose of earning and not for resale, improving and extending fixed
assets, increasing the earning capacity of the business and raising capital for the business. Purchase of
new plant, additions to the building, brokerage and commission paid for procuring long term loans are
a few examples of such expenditure. All items of capital expenditure appear on the asset side of the
Balance sheet.

1.4 REVENUE EXPENDITURE :

Revenue expenditure consists of expenditure in cure on one accounting period and the full benefit
of it is enjoyed in the same period. Therefore, it is normally of recurring nature. Such an expenditure
does not increase the earning capacity of the business and it does not bring into existence an asset. It
includes expenses incurred for acquiring assets for resale at a profit or for conversion into finished
products, for maintaining fixed assets for resale at a profit or for conversion into finished products for
maintaining fixed assets in good working order e.g. normal repairs and renewal of plant, white washing
of building replacement of machinery etc; for keeping the organization going eg. Rent, rates and taxes,
wages and salaries, insurance and other trade charges. All items of revenue expenditure appear in the
trading and profit and loss Account.

1.5 REVENUE EXPENDITURE BECOMING CAPITAL EXPENDITURE OR

CAPITALISED EXPENDITURE :
An expenditure which is primarily of revenue nature but incurred for the purpose of acquiring
any asset or auditing to its value is termed as capitalised expenditure. The following are some of the
examples of revenue expenditure becoming capital expenditure.
1. Repairs : Repairs are usually revenue expenditure but if we purchase a second hand machinery
and pay for repairs necessary to make it suitable for our purpose, then repairs become capital
expenditure and should be added to the cost of the machinery.
2. Wages : Wages are usually a revenue charge but if paid to the employees for the construction or
erection or installation of the fixed assets of the business ,then these become capital expenditure
and should be added to the cost of the fixed asset concerned.
 Advanced Accounting 1.3 Non – Profit Organisations - I

3. Legal expenses : Legal expenses are usually a revenue charge but if paid on acquiring a property
should form an additional cost of the asset acquired.
Those are usually a revenue items but payments made for transporting newly acquired asset will
form additional cost of the asset thus being treated as capital expenditure.
4. Freight and carriage : These are usually a revenue items but payments made for transporting
newly acquired asset will form additional cost of the asset thus being treated as capital
expenditure.
5. Interest : Interest on borrowing and capital generally a revenue item is allowed to be treated as
capital item if paid during the period of construction.
6. Preliminary expenses :Initial expenses, connected with the formation of a company though
revenue in nature are allowed to be capitalised and can be shown as and asset in the balance sheet.
7. Brokerage and stamp duty : Normally these are revenue items but, brokerage paid on the
purchase of a property and also the stamp duty on it may be treated as capital expenditure as an
additional cost of purchase
8. Development Expenditure : In concerns like mines, tea, calories, horticulture, rubber
plantations etc. a sizeable amount is spent during the period of development and up to the time
they begin to earn. Such expenses must be treated as capital expenditure.
9. Advertising : A huge sum spent on advertising in a year, the benefit of which shall accrue in
future years, also may have the effect of creating a future good will and thus sums spent may be
capitalised. For example, lakhs of rupees are spent in changing the name from Binaca to cibaca
and Hutch to oda.
10. Raw materials and stores : They are usually a revenue charge but if consumed in making of a
fixed assect they must be treated as a part of the cost of the asset.

Deferred revenue Expenditure : It is the expenditure which would normally be treated as revenue
expenditure but, it is not written off in one year as its benefit is to completely exhaustible in the year in
which it is incurred or is of a non - recurring and special nature and large in amount. It may be spread
over a number of years a proportionate amount being charged to the profit and loss account of each year
and the balance is carried forward to subsequent years as deferred revenue expenditure and is shown as
an asset in the balance sheet. Sometimes extraordinary losses are also treated as deferred revenue
expenditure and charged to profit and loss account for four to five years.

1.6 USUAL ITEMS OF CAPITAL EXPENDITURE :

The following items usually represent capital expenditure.
1. Cost of acquisition of fixed asset like good will, land, building, leasehold promises, tools
and equipment, furniture, trade marks etc.
2. Expenses of putting a new asset in a working condition like installation and erection
expenses of any fixed asset.
3. Additions or extensions or structural improvements to the existing assets leading to their
working efficiency or revenue earning capacity or cost reduction e.g. refurnishing of the
sitting accommodation of a cinema hall etc.
4. Development nature like development of mines and plantation.
5. Formation expenses of a business are called preliminary expenses like preparing and filing
the legal documents required for starting a business etc.
 Centre For Distance Education 1.4 Acharya Nagarjuna University

1.7 USUAL ITEMS OF REVENUE EXPENDITURE :

The following are usual items of revenue expenditure.

1. Expenses incurred in the ordinary conduct and administration of the business e.g rents,
salaries, wages, advertisement etc.
2. Expenses incurred in purchasing raw materials or stock of finished goods for resale and
supplies like grease, cotton, oil for machines etc.
3. Expenses incurred to maintain assets in working order like ordinary repairs renewals or
alterations etc.
4. Expenses incurred on maintaining or pushing sales like, carriage of finished goods,
commission, travelling expenses, free samples and gifts etc.
5. Loss arising from sale of fixed assets.
6. Loss arising from damage, destruction, theft of stock in trade, cash etc.
7. Loss arising from depreciation in the values of fixed assets or book values of assets
discarded.
8. Annual renewal fees of patents etc.
Illustration 1 which of the following expenditures are capital, revenue or deferred revenue
expenditure.
1. Rs 10,000 spent on dismantling, removing and reinstallation of machinery.
2. Rs 2,00,000 was spent on putting up a gallery in a theatre hall.
3. Rs 3,000 paid as insurance premium.
4. The freight and cartage on the new machinery amounted to Rs 5,000 and the erection
charges cost Rs 1000
5. A machinery whose book value was Rs 17,000 and was sold for Rs 7,000
6. Rs 15,000 was paid as compensation for cancellation of a contract.
7. An amount of Rs 1000 was spent as legal expenses for maintaining an existing title to the
assets of the business.
8. Rs 1,50,000 was spent on advertising a new product in the market.
9. Rs 20,000 was spent on white washing and painting of the factory building.
10. Rs 1,500 was spent by a chartered accountant on books helping in his profession.
Solution :
1. Rs 10,000 spent on dismantling, removing and reinstallation is a capital expenditure.
2. Rs 2,00,000 spent on putting up a gallery in a cinema hall is a capital expenditure
3. Insurances premium paid is a revenue expenditure
4. Rs 5,000 spent on freight and cartage and the erection charges Rs 1,000 on new machinery
is a capital expenditure and it shall be added to the cost of the machinery
5. Rs. 10,000 incurred as a loss on the sale of an old machinery being manageable is a revenue
loss and to be debited to the profit and loss account of the year in which it occurs.
6. Rs 15000 paid for cancellation of contract is a capital expenditure since it has resulted in
avoiding an unnecessary investment.
7. Rs 1000 spent as legal expenses on defending the title to the assets of the business as
revenue expenditure.
 Advanced Accounting 1.5 Non – Profit Organisations - I

8. Rs 1,50,000 spent on advertising is a heavy amount, so it should be capitalised and the

portion of current year should be debited to profit and loss account and the remaining
portion should be shown in the balance sheet till it is completely wiped off.
9. Rs 20,000 spent on white washing and painting of the factory building is a revenue
expenditure.
10. Rs 1,500 spent by a chartered Accountant on books helping in his profession is a revenue
expenditure.

1.8 CAPITAL AND REVENUE RECEIPTS :

Capital receipts of business comprise capital contributed by partner or by the share holders, loans
sale proceeds of any fixed assets etc. In case of clubs and associations, receipts on account of life
subscriptions, entry free, government grants, legacies and endowments are capital receipts, Revenue
receipts, received commission, interest on investment etc. In case of club etc annual subscriptions, sale
of golf balls, receipts arising out of the premises being given to others for use on charges are revenue
receipts, Revenue receipts are treated in the revenue account while the capital receipts are treated in the
balance sheet.

Guidelines for deciding a receipt as capital or revenue :

The following guidelines may be stated to decide whether a particular receipt is capital or revenue.

1. Nature of receipts is to be determined by its character in the hands of the person receiving
it not by the source from which payment was made e.g. payment of interest out of capital
by a company still under construction is capital expenditure for the company but revenue
receipt in the hands of the person receiving it.
2. In case of a single transaction of purchase and sale of property the motive of the owner
will decide whether the receipt is capital or revenue ex; A sells shares held by him as
investment it is a capital receipt but if A sells the shares with speculative motive it will be
a revenue receipt.
3. A receipt on account of fixed asset is a capital receipt while a receipt on account of current
assect is a revenue receipt, for ex; sale proceeds of building, plant etc constitute capital
receipt while sale of stock - in - trade is revenue receipt.
4. Where a receipt is in substitution of a source of income there it is a capital receipt but if it
is in substitution of income alone it is a revenue receipt. For eg; if a railway passenger
meets with an accident and dies or is permanently disabled, compensation received from
the railway department is capital receipt because this receipt is in substitution of source of
income i.e his life, but if he is rendered only temporarily disabled the receipt will be
revenue one as it is in substitution of income alone i,e loss of earnings during the period of
disablement.
5. Where a sum is received for the surrender of certain right, there it is a capital receipt but
where the sum received is in the nature of compensation for loss of future profits there it
is a revenue receipt. For eg. A the lease holder of fire field and manufacturer of
fire - clay goods was prevented by the railway company for working on the field adjacent
to the railway lines. Amount paid by the railway company to A is a capital receipt because
it is the receipt in lieu of his right to work upon the clay field.
 Centre For Distance Education 1.6 Acharya Nagarjuna University

Examples of capital Receipts :

1. Compensation received for the loss of right of future remuneration.
2. Compensation received for suspension of export license.
3. Compensation received by one partner of a partnership from another partner for
relinquishing all his rights in the partnership etc.
Examples of Revenue Receipts :
1. Receipts of annuities for transfer of a capital asset.
2. Lump - sum received in consideration of reduction of remuneration
3. Compensation received for premature termination of contract.
4. Considerations received for transfer of permits etc.
Capital and Revenue losses :
Revenue loss is the loss of some revenue receipts in the course of the business and is incidental
to it. Any loss which can’t be termed as revenue loss is a capital loss. For eg: loss of stock - in - trade
by fire, white ants or by theft is a revenue loss where as loss of fixed asset like building plant etc. By
fire or accident or earth quake is a capital loss.
Loss caused to the business by reason of cash being is appropriated by an employee is a revenue
loss but if the fund reach home of the owner and there after if the funds are lost, then the loss is outside
the trade and not incidental to the business therefore it is a capital loss ($Exceptions are banks or lending
houses).
1.9 RECEIPTS AND PAYMENTS ACCOUNT :
It is a summary of cash transactions at the end of a particular period showing the receipts and
payments of cash during the period under different heads.
Features :
The features of Receipts and payments account are as follows.
1. It is prepared by non - trading concerns in lieu of cash book of trading concerns.
2. It is a real account.
3. It starts with the opening balance of cash in hand and at bank.
4. All receipts and payments of cash are entered on the debit and credit side respectively.
5. No distinction is made between the capital and revenue items while entering the receipts
and payments.
6. All receipts and payments whether they are relating to the current, preceding or succeeding
period, are written in this account.
7. Opening balance of this account shows cash in hand at the beginning of the accounting
period and closing balance shows cash in hand at the end of accounting period.
8. All types of Accounts i,e, personal real and nominal are written in this account.
9. No adjustments, outstanding expenses, prepaid expenses provision for doubtful debts or
depreciation are made in this account as it is prepared on cash system of accounting.
10. It does not reveal the financial results or the financial position of the account of the accrued
incomes and outstanding expenses.
 Advanced Accounting 1.7 Non – Profit Organisations - I

The following is a specimen of the receipts an payments account of a club for a particular year.
Receipts and payments Account of .......................
for the year ending 31 March 2007.
Dr. Cr
Receipt Rs Payment Rs
To Balance b/d xxx By Rent xxx
To Subscriptions xxx By Furniture xxx
To Entrance fee xxx By Sports Material purchased xxx
To Legacy xxx By Building xxx
To Donations for building xxx By Ground maintenance xxx
To Interest received xxx By Salaries xxx
To Sale of furniture xxx By Honorarium xxx
To Sale of old Sports material xxx By Match expenses xxx
To Match fund xxx By Stationery xxx
By Investments xxx

By Entertainment xxx

By Balance c/d xxx

xxx xxx

Illustration 1
Jimkhana club kept its accounts on cash basis and the figures for the year 2006-07 are given
below. You are required to prepare Receipts and payments Account
Rs. Rs.
Subscriptions received Watchman s wages 27,200
2005 - 06 8000 salaries 40,000
2006 - 07 72,000 postage 4,800
stationery 12,000
Receipts from
common Room 50,000 Rent 20,000
Hiring Rooms 4,000 cash in hand
Billiards Rooms 24,000 1 - 4- 2006 7,200
supplies room 34,000
Receipts and payments Account of JimKhana Club for the year ending on 31 - 3- 2007
Dr. Cr
Receipts Amount Payment Amount
Rs Rs.
To Balance b/d 7,200 By supplies for
To Subscriptions Entertainment Room 34,000
 Centre For Distance Education 1.8 Acharya Nagarjuna University

2005-2006 8,000 By Watchman’s wages 27,200

2006-2007 72,000 By Salaries 40,000
To Receipts from By Postage 4,800
Common Room 50,000 By Stationery 12,000
Hiring Room 4,000 By Rent 20,000
Billiards Rooms 24,000 By Electricity 16,000
By Balance c/d 11,200

1,65,200 1,65,200
1.10 INCOME AND EXPENDITURE ACCOUNT :

It is prepared by non - trading concerns in lieu of profit and loss Account. To know whether
during a particular period the income of the concern or organisation have exceeded or faller short of the
expenses this account is prepared. In this account current expenses are compared with current incomes.
The features of this account are.
1. It does not start with any opening balance.
2. It is a nominal account Expenses are shown on the debit side and incomes on the credit
side.
3. Only revenue items are recorded in it capital items are totally excluded.
4. Only incomes and expenses of the concerned year are recorded in it and income and
expenditure relating to the preceding or succeeding periods are excluded while preparing
this account.
5. This account is prepared on mercantile system of accountancy and thus all adjustments
relating to prepaid or outstanding expenses and incomes, provision for depreciation or
doubtful debts will be made.
6. Only nominal accounts are taken into consideration for the preparation of this account and
for personal and real accounts a Balance sheet must be prepared along with this account.
Difference between Receipts and payments.
Account and Income and Expenditure Account
The following are the main differences between a Receipts and payments Account and Income
and Expenditure Account.
Receipts and payments account It come and Expenditure Account.

1. It is a real Account 1. It is a nominal account.

2. It is like cash book prepared by trading 2. It is like profit and loss account prepared by
concerns. non - trading concerns.
3. It starts with a balance being cash at the 3. It does not start with any opening balance.
being of the year.
4. Receipts are shown on the debit sid and 4. Incomes are shown the credit side and
payment on the credit side. expenditure on the debit side.
 Advanced Accounting 1.9 Non – Profit Organisations - I

5. All items whether of capital or revenue nature 6. Income and expenditure of the current
are shown in this account. year only shown in it.
6. All receipts and payments whether they are of
preceding, current or succeeding period are 7. Income and expenses are shown after
entered in it. including all outstanding income and
7. Outstanding receipts and payments are not expenses on accrued basis.
shown in it as it is prepared on cash basis. 8. The closing balance represents surplus or
deficit for the concerned period.
8. The closing balance represents cash in hand on 9. The Balance sheet must be prepared in
that date. order to accommodate real and personal
9. It is not necessary to prepare Balance sheet accounts a long with this account.
along with this account.
5. Only revenue items are shown in this account.

1.11 PREPARATION OF INCOME ANDEXPENDITURE ACCOUNT FROM

RECEIPTS AND PAYMENTS ACCOUNT :
The following steps are to be taken to convert a receipts and payments account into an Income and
Expenditure account:
1. Leave the opening and closing balance of cash given in the Receipts and payments account.
2. Take only revenue items of income and expenditure and leave all those items which are of
capital nature.
3. Make all adjustments for outstanding and prepaid incomes and expenses, provision for
depreciation or bad debts etc.
4. Take items only of the current period i.e; items relating to the preceding and succeeding
periods are to be ignored.
5. In Income and Expenditure account expenditure is recorded on the debit side and income
is recorded on the credit side.
6. Once Income and Expenditure Account is balanced it shows either surplus or deficit, If
credit balance is more than Debit balance it is called surplus and if the debit balance is
more than credit balance, it is called as Deficit.
Illustration – 2 :
From the following particulars prepare Income and Expenditure account of Guntur club for the
year ended 31st Dec 2007.
Subscriptions received for 2007 22,000
Entrance fees received for 2007 3,000
subscriptions and entrance fee for 2006 1120
(estimated Rs 600 realised)
subscriptions and entrance fees for 2008 6,200
subscriptions for 2007 to be taken at 4000
Miscellaneous Expenses 840
Expenses for 2007 paid 32,000
Expenses unpaid 920
Liabilities for 2007 paid
(estimated Rs 2800) 2400
Audit fees for 2007 not paid 800
 Centre For Distance Education 1.10 Acharya Nagarjuna University

Profit on service account net 9200

Interest on loan paid 1280
capital expenditure written off 4800
surplus from 2006 account 1600
capital expenditure in 2007 provide 8240
for depreciation
for this year 2680
cash in hand 7200
Solution :
Guntur club Income And Expenditure Account for the year ended 31st December 2007.

Expenditure Amount Income Amount

Rs Rs

To Expenses By subscription and

(32000 + 920) 32,920 Entrance fees

To Audit Fees 800 (22000 + 3000 + 4000 +520) 29,520

To Interest on loan 1,280 By Miscellaneous Expenses 8,400

To Capital Expenditure 4,800

(Written off) By Liabilities provided

To Depreciation 2,680 in excess last year

Surplus 5,040 (2800 - 2400) 400

By Profit on service account. 9,200

47,520 4,7520

1.12 SUMMARY :
The institution which are created not with a Profit making object but for the development of
Welfare activities both for the General Public and for its members are called Non-trading concerns.
Even this concerns are not started with Profit motive these concerns also will have certain expenses and
incomes, Assets and Liabilities. At the end of the year to know the total expenses, Incomes and to know
the financial positions of the concerns they prepare certain accounts such as receipts and payments
account, Income and Expenditure account and Balance sheet. Receipt and Payment account is a in lieu
of cash book, and incoming expenditure account is in lieu of profit and loss account of the trading
concerns.

1.13 SELF ASSESSMENT QUESTIONS :

1. What is Capital Expenditure ? Illustrate.
2. What is Revenue Expenditure ? Illustrate.
3. Distinguish Capital and Revenue Expenditure giving illustrations.
4. What is Deferred Revenue Expenditure ? Illustrate.
 Advanced Accounting 1.11 Non – Profit Organisations - I

5. What are Capital and Revenue receipts ? Explain with illustrations.

6. Explain the importance of distinguishing the Capital and Revenue items while
preparing final accounts of concerns.
7. What types of accounts are prepared by non-trading concerns ?
8. What is Receipts and Payments account ?
9. What is Income and Expenditure account ?

1.14 EXERCISES :

1. From the following items find out which are of Capital and Revenue items.
i Amount paid on goods purchased Rs.1,000
ii Rs. 2,000 paid for whitewash of cinema theatre.
iii Rs. 2,500 paid for repairs of second hand lorry purchased.
iv New machinery purchase and erection charges paid Rs.5,000.
v Repairs on machinery Rs.1,000.
vi Spare parts of machinery Rs.1,500.
vii Equipment purchased for improving the production capacity Rs.10,000.

2. The following are the expenses paid by the Padmalaya Ltd. for construction of cinema theatre up
to 30th June, 1999. Find out whether they are Capital Expenditure or Revenue Expenditure.
Rs.
i. Fire Insurance 2,000
ii. Construction of temporary accommodation to workers at site, which is
demolished after completion of construction work 11,000

3. Out of the followings which are Capital and Revenue items.

i. Cost of dismantling, removing and re-installing plant Rs.8,000
ii. For transporting goods to the new spot Rs.1,600.
iii. Sale of old machinery Rs.6,000 which had a book value of Rs.10,000. Installation of
new machinery at a cost of Rs.15,000.
iv. Installation expenses of new machinery Rs.500.
v. Repairs paid Rs.2,500.
vi. Construction of new factory building with a cost of Rs.5,00,000. Cost of preparation
of p l a n (blue print) Rs.30,000, repairs of old building Rs.20,000.
vii. Fire Insurance Premium Rs.2,000.

1. Purchased second hand furniture 50,000

Repairs of furniture 5,000

Wages paid for erection 4,000

2. Licence fee 25,000

3. Fine paid for violation of rules 1,000
 Centre For Distance Education 1.12 Acharya Nagarjuna University

4. From the following particulars prepare a Receipts and Payments A/c

Rs.
Cash in hand 1,000
Cash at Bank 5,000
Subscription Receive 33,000
Donations received 2,600
Investments purchased 10,000
Rent paid 4,000
General expenses 2,100
Postage & Stationery 700
Sundry expenses 300
Cash balance at close 200
(Ans : Cash at Bank closing Rs.24,300)

5. Prepare a Receipt and Payment account from the following particulars.

Rs.
Opening balance of cash in hand 1,800
Rent paid 450
Stationery purchased 540
Subscriptions received
Previous year 1,800
Current year 4,050 5,850
Flood relief expenses 684
Repairs 756
(Ans : Cash in hand closing Rs.6,300)

6. From the following particulars prepare Income and Expenditure account Rs.
Fees collected (Including Rs.24,000
on account of last year) 2,24,000
Fees for the year outstanding 40,000
Salary paid (including Rs.2,400 on
account of last year) 19,200
Salary outstanding 3,200
Entertainment expenses 4,000
Tournament expenses 8,000
Meeting expenses 16,000

Honorarium paid 810

Sale of old furniture 1,890
 Advanced Accounting 1.13 Non – Profit Organisations - I

Travelling & Conveyance 6,400

Purchase of books 16,000
Periodicals 8,000
Rents 9,600
Postage, Telephone and Telegrams 13,600
Printing and Stationery 4,000
Donations received 6,400
(Ans : Surplus Rs.1,56,800)
7. Following is the Receipt and Payments account of Visakapatnam cultural club for the year ended
31-12-2000.
Dr. Cr.
Receipts Rs Payments Rs
To Donations 25,000 By Salaries 900
To Life membership 2,000 By Cricket 300
To Sports competition fund 5,000 By Tennis 270
To Subscription 1,600 By Inusrance 180
(including Rs.50 for 2001) By Garden maintenance 85

To Locker rent 50 By Printing 15

To Interest on securities 200 By Telephone 125
To Cricket 150 By Investments 9,000
To Tennis 100 By Balance c/d 1,825
To Billiards 100

34,200 34,200
Subscriptions receivable for 2000 Rs.150, outstanding salaries Rs.100. Half of the
donations are to be capitalised, accrued interest Rs.300, Prepaid insurance Rs.30.

Prepare Income and Expenditure Account for the year ended 31-12-2000. (Asn :
Surplus Rs.13,155)

1.15 SUGGESTED READINGS :

Financial Accountancy : Shukla Grewal

Financial Accountancy : Jain and Narang
Financial Accountancy : R.L. Gupta & V.K. Gupta

Dr. Ch. Suravinda

 LESSON - 2
NON - PROFIT ORGANISATIONS - II
OBJECTIVES : In the previous lesson you learned what is a Non trading concern and how a receipt
and payment account and an Income and Expenditure Account is prepared? After going through this
lesson the student can know how the Balance sheet of a Non - Trading concern is prepared ? And what
are the items appear in this statement ?.
STRUCTURE OF THE LESSON :

2.1 Introduction
2.2 Some special terms pertaining to Non -Profit Organisations
2.3 Illustrations
2.4 Summary
2.5 Self Assessment Questions
2.6 Exercises
2.7 Suggested Readings

2.1 INTRODUCTION :
Even a non - Trading concern is established with service motive , these concerns also will have
some assets as well as liabilities for expenses etc. Hence the Income and Expenditure Account is
accompanied by the Balance sheet like in trading concerns a balance sheet is to be prepared even by
non - Trading concerns to complete the double entry effect. The Balance sheet covers all those items
such as assets, capital fund etc. Capital Fund is similar to capital Account of Trading concerns. Non -
Trading concerns do not have formal capital like that of Trading concerns. Hence, excess of income
over expenditure and capital receipts or receipts that are capitalised are accumulated under the heading
“ capital Fund” and shown as liability in the Balance sheet.
2.2 SOME SPECIAL TERMS PERTAINING TO NON - TRADING
ORGANISATIONS :
While preparing final accounts of non - profit organisations the following items are often used:
1. Legacy : When an amount is received as per the will of some person it is called legacy As it is
non - recurring and capital nature, it is to be capitalised. But if the amount is small it can be
taken as an in come.
2. Donation : Donations are often received by these organisations from both individuals and
institutions, Donation is the amount received as a gift. Donations may be broadly classified into
two categories; viz : specific donations and general donations.
3. Specific Donations : A donation received for a specific purpose, whether big or small is
capitalised and is taken to the liabilities side of the balance sheet For example a donation for
the construction of a building. This amount should be utilised only for the purpose for which it
is received.
4. General Donations : A general donation is the amount given by parties without specifically
mentioning the purpose for which it should be utilised. This amount can be spent for any
purpose.
However, normally general donations of big amounts are capitalised and small amounts are
treated as revenue income.
5. Endowment Fund : “ Endowment is the money or property given by parties so as to provide
a permanent source of income to support the institution, e.g: the corpus fund of a university
since the fund provides a permanent means of support, any amount received on account of this
 Centre For Distance Education 2.2 Acharya Nagarjuna University
6. is capitalised and shown as a liability, but the interest or dividend received on account of this
fund is treated as income.
7. General fund : Amounts which are received for no specific purpose and which are capitalised
are shown under this head on the liabilities side of Balance sheet. But the income obtained on
account of this fund is taken to the credit side of income and expenditure account.

8. Specific funds : Amounts received for a specific purpose are capitalised and shown in the
Balance sheet on its liablities side e.g; price fund tournment fund, building fund, receipts and
incomes on account of these specific funds should be added to the fund account and should not
be taken to Income and Expenditure Account. All expenses on account of these funds should
be deducted from the particular fund in the Balance sheet only. In case the expenses exceed the
fund amount the excess expenses should be charged to the debit side of the income and
Expenditure Account.

9. Subscription : Amounts agreed to be paid by the members or subscribers regularly at periodical

intervals are called subscriptions : They are a regular source of income to the organisation.
Hence subscriptions are shown as income.

10. Admission or Entrance fees : This is the amount received from a member at the time of his
initial admission or readmission into the organisation. There is a difference of opinion about
the treatment of this item in accounts. Some people argue that it should be capitalised since it
is not a recurring item as each member pays it only once. However, there are others who contend
that though it is paid by each member only once, the club or college receives it regularly and
that as such, according to them, it should be treated as income, whatever the arguments are, in
the absence of specific instructions to capitalise. entrance or admission fees, it may be treated
as revenue income i.e. shown as the credit side of income and expenditure account.

11. Honourarium : It is taken payment made to certain people for their services. It is generally
treated as revenue expenditure and charged to the Income and Expenditure Account. But if the
amount is paid on account of a specific programme conducted in connection with a specific
fund the amount should be deducted from the specific fund in the Balance sheet.

12. Sale of old Assets : Any receipt from the sale of an old asset such as furniture, is a capital
receipt and as such it should not be taken to Income and Expenditure account, It should be
deducted from the concerned asset in the Balance sheet. However, any loss on the sale of asset
is charged to income and expenditure account. In case of gain on the sale of an asset, if the
amount is small, it is taken to the Income and Expenditure Account, but if it is a big amount it
is treated as a capital gain and shown in the Balance sheet.
13. Sale of old news papers etc: The amount received on account of sale of old news papers or
old sports material etc. treated as revenue income.

2.3 ILLUSTRATIONS :
From the following Receipts and payments account of a Hospital for the year ending 31-122007
prepare an Income and Expenditure Account and Balance sheet as at the date.
Receipts and Payments Account for
the year ended 31-12-2007.
Receipts Amount Payment Amount
Rs Rs

To Cash in hand 3,565 By Medicine 15,295

 Advanced Accounting 2.3 Non – Profit Organisations - II
To Subscriptions 23,998 By Doctors honourarium 4,500
To Donations 7250 By Salaries 13,750
To Interest on By petty expenses 230

investments @ 7% 3,500 By Equipment 7,500

To Proceeds from charity 5,225 By Expenses on charity show 375
Cash in hand 1,888

43,538 43,538
Additional Information
1-1-2007 31-12-2007
1. Subscriptions due 120 140
2. Subscriptions received in Advance 32 55
3. Stock of medicines 4405 4870
4. Estimated value of equipment 10,600 15,800
5. Buildings (cost less depreciation) 20,000 19,000
Solution :

Balance sheet as on 1-1-2007

Liabilities Rs Assets Rs
Subscriptions received Buildings 20,000
in advance 32 Equipment 10,600
Capital fund Stock of medicines 4,405
(Balancing figure) 88,658 Investments 50,000
Cash in hand 3565
Subscriptions due 120
88,690 88,690
Income and Expenditure Account for the year ended 31st December , 2007.
Dr Cr
Expenditure Amount Assets Amount
Rs Rs

To cost of medicines 14,830 By subscription 23,995

To Salaries 13,750 By Donations 7,259
To Doctors honourarium 4,500 By Interest on investments 3,500
To Petty expences 230 By proceeds from

To Depreciation charity show 5m225

Equipment 2300
Buildings 1000 3,300 Less expenses 375 4850
To Excess of Income over
expenditure
2985
 Centre For Distance Education 2.4 Acharya Nagarjuna University
39,595 39595
Dr Balance sheet as on 31-12-2007 Cr
Liabilities Amount Assets Amount
Rs Rs

subscription received Buildings 20,000

in advance 55 less Depreciation 1,000 19,000

Capital fund 88658 4,500 Equipment 10,600

Add Excess Add additions 7,500

of Income 18,100

Over expend Less: Depreciation 2,300 15,800

deture 2,985 91,643 Stock of medicines 4,870

Investments 50,000

Cash in hand 1,888

Subscriptions due 140

91,698 91,698

Working Notes :
1. Cost of Medicines used Rs.
Stock of Medicines 1-1-2007 4,405

Add Purchases during the year 15,295

19,700

Less Stock of Medicines on 31-12-2007

14,830
2. Subscriptions : Rs
Actual amount received 23,998

less Received for 2006 120

Received in advance 55
175
Add Due at the end of the year 140
Received in advance in
2006

3. Depreciation on Equipment Rs.

Equipment on 1-1-2007 10,600
Add Additional during the year 7,500
less Equipment on 31-12-2007 18,100
15,800
2,300
 Advanced Accounting 2.5 Non – Profit Organisations - II
Illustration II

The following is the statement of assets and liabilities of the city central library as at 30-62006.

Liabilities Amount Assets Amount

Rs Rs

Out standing expences 6,500 Cash 32,000

Capital Fund 4,43,500 Furniture 48,500

Debtors :
Subscriptions outstanding 7500
For use of lecture hall 3500
11,000
Books Account 1,68,500

Investments 50,000

Buildings 1,40,000

4,50,000 4,50,000

The following were the cash transactions for the year ending 30-6-2007

Particulars Amount Particulars Amount

Rs Rs

To Balance b/d 32,000 By salaries 24,000

To Entrance Fee 26,000 By Municipal taxes 7,000

To subscriptions 85,000 By Insurance on builder 5,000

To sale of furniture 6,000 By Additions to library 12,500

To sale of old News By Outstanding creditors

Papers 600 of last year paid 6,500

Repairs 2,500

To rent on library hall By Electric installation expenses 45,000

To proceeds from By printing & stationery
4,000 lectures and entertainments By postage 500
By sundry expenses 1500
Balance c/d 81,500
1,90,000
 Centre For Distance Education 2.6 Acharya Nagarjuna University

It was ascertained that Rs 11,000 was outstanding by way of subscriptions and Rs 3,750 for use
of library hall. Insurance on building was prepaid to the extent of 1,750. There were creditors
outstanding for expenses to the extent of Rs 8000,
You are required to prepare an Income and Expenditure Account and Balance sheet as at 30-6-
2007 after providing for depreciation on building @ 2 1/2% and writing down investments by 5% and
library books by 10%.
Solutions:
Dr City Central Library Income & Expenditure for year ending 30-6-2007 Cr
Expenditure Amount Income Amount

Rs Rs

To Salaries 24,000 By subscriptions 85,000

To municipal taxes 1,000 Add Outstand 11,000

96,000

To insurance 5000 less

prepaid 1750
3250 less last year 7500 88,500
To repairs 2500 By sale of old Newspaper 600
To sundry expenses 1500 By rent of library hall 10,400

To printing & stationery 4000 Add Out standing 3,750

To postage 500 14,150
To outstanding expenses 8000 less Last year 3500 10,650
To Depreciation 3500 By proceeds from

Buildings
Investment
25,00 lectures and entertainment 30,000
Library books 18,700
To surplus (excess of
income over expenditure)
54,100
1,29,750 1,29,750

Dr City central Library Balance sheet as on 30-6-2007 Cr

12,500 1,62,900
1,81,100
18,100 47,500
50,000
11,000
2,500
3,750
1,750
81,500
5,32,400
 Advanced Accounting 2.7 Non – Profit Organisations - II
Add Additions

less Depreciation Investments

Amount Assets Amount
Liabilities

(1) Rs. (2) (3) (4)Rs

Capital fund 4,43,500 Buildings 1,40,000

Add surplus 54,900 less 3,500 1,36,500
Entrance fees 26,000 Depreciation 42,500
outstanding Furniture less
express furniture sold
48,500
6,000

5,24,400
8,000
Electric Installation 45,000

Library books 1,68,500

Less Depreciation
Sundry debtors
For subscriptions
For rent of library hall Prepaid insurance
Cash

Sometimes income and Expenditure and Recipts and payment amounts are given in the question
and it is required to prepare the balance sheet both at the beginning and at the end of the period, in such
case following procedure may be adopted.
1. From the particulars given in the questions prepare the balance sheet in the beginning of the
year.
 Centre For Distance Education 2.8 Acharya Nagarjuna University
2. Compare the ‘receipts side’ of the Receipts and payments amount to income side of income
and expenditure about to ascertain
(i). Subscription in arears, previous and current years
(ii). income received in advance and
(iii) sale of an asset during the year
3. Similarly compare the payment side of the Receipts and payment account to expenditure side
of the income and expenditure account to ascertain,

(i) outstanding expenses during the year.

(ii) prepaid expenses during the year.

(iii) stock of stationery in hand

(iv) depreciation on assets and

(v)purchase of an asset during the year.

Illustration 5 :
From the following information relating to Hyderabad sports club prepare the balance sheet as
on 1-1-2007 and 31-12-2007. Assets and liabilities as on 1-1-2007 club grounds and pavilion
Rs,250,000 sports equipment’s Rs, 1,50,000, Furniture Rs 3,51,000 and subscription in assets on that
date Rs 5000. Creditors For stationery Rs 5,000.

Receipts and payment for the year

Ending on 31-12-2007
Receipts Amount Payment Amount
Rs Rs

To Balance b/d 25,000 By printing and stationery 15,000

To Subscription
2006 4,500 By Salaries 55,000
2007 90,000 By Advertising 10,000
2008 2,500 By Fire insurance 7,500
To Sale of old news papers 1,500 By Furniture 10,000
To Rent received 11,000 By Investment 90,000
To Entrance fees 60,000 By Balance c/d 7,000
1,94,500 1,94,500
Dr Income and expenditure Account for the year ending on 31-12-2007 Cr
Expenditure Amount Income Amount
Rs Rs

To Salaries 60,000 By subscriptions 95,000

To Printing and stationery 14,000 By entrance fees 60,000
To Audit fees 2500 By rent received 12,000
To Advertising 10,000 By sale of old news paper 1,500
To fire insurance 6,000
 Advanced Accounting 2.9 Non – Profit Organisations - II

Dr Rs Rs

Creditors for stationery 4000 Cash 7000

Salary outstanding 5000 Ground and pavilion 2,50,000
Audit fees out standing 2500 Sports equipment 1,20,000
(1,50,000 - 30,000) 1,20,000

Subscriptions in advance 2500 Furniture 41,000

(35,000 + 10,000 - 4000)
Capital Fund 4,60,000
Add surplus 42,000 5,02,000 Investments 90,000
Subscription outstanding
2006 500
207 5000 5,500
Insurance prepaid 1,500

(7500 - 6000)
Rent Due 1000
(12000 - 11,000)

To Depreciation on
sports equipment 30,000
To Furniture 4,000

To excess of income over

Expenditure 42,000
1,68,500 1,68,500

Solution :
Dr Balance sheet As on 1-1-2007 Cr
Liabilities Amount Asserts Amount
Rs Rs

Creditors for stationery 5000 Cash 25,000

Capital Fund 4,60,000 Ground and pavilion 2,50,000
Sports equipment 1,50,000

Furniture 35,000

Subscription outstanding 3,000

4,65,000 4,65,000
5,16,000 5,16,000
Some times Income and expenditure account is given along with notes and it is required to
prepare the receipts and payments account. In such a case the following producer may be adopted.
1. All expenditure, whether capital or revenue or relating to the current succeeding and
preceding period incurred during the year must be shown on the credit side of this account.
2. All receipt of cash, whether capital. Revenue or relating to the current, sending and
preceding period, should go to debit side of this account.
 Centre For Distance Education 2.10 Acharya Nagarjuna University
3. Opening and closing balance of receipts and payment account are to be taken into
consideration.
4. Eliminate all adjustments relating to provisions for doubtful debts or depreciation which
are made for preparing income and expenditure account.
5. Purchase or sale of assets can be calculated by comparing the net value of asset on two
dates beginning and the end of the year.
Illustration 6 :
The following is the Income and expenditure account of Guntur stadium club for the year ended
31st March 2007.
Dr Income and Expenditure Account Cr
For the year ended 31-3-2007
Expenditure Amount Income Amount
Rs Rs

To salaries 7,800 By subscription 27,200

To Rent 1,800 By Donation 2000

To Printing 300

To Insurance 200

To Audit fees 300

To Games & sports 1,400

To Subscription written off 140

To Miscellaneous expences 5,800

To loss on sales of furniture 1,000

To Depreciation on sports
Equipment 24,00
To furniture 1,240

To excess of income over

expenditure
6,820
29,200 29,200
Additional information :
31-3-2006 31-3-2007
Subscription in areas 1040 1,480
Advance subscription 400 600
Outstanding expences
Rent 200 320
Salaries 480 140
Audit fees 200 300
Sports equipment loss depreciation 10,000 9,600
Furniture less depreciation 12,000 11,160
Prepaid Insurance ----- 60
Book value of furniture sold is Rs 2,800
 Advanced Accounting 2.11 Non – Profit Organisations - II

Entrance fees capitalised Rs 1600. On 1st April 2007 there was no cash in hand but there is bank
overdraft for Rs. 6,000 on 31st march 2007, cash in hand amounted to Rs 340 and the remaining was
Bank balance.
Prepare the receipts and payment amount of the club for the year ended 31st march 2007.
Solution:
Dr Guntur stadium club receipt and Cr
payments Account for the year ended 31-3-2007
Receipts Amount Income Amount
Rs Rs

To subscription Received By Balance b/d 6000

(27,200 + 1040)+ 600) - (1480 - 400) 26,820 By sports equipment s 2000

-140) 2000 (9600 + 2400 – 10,000)

To Donations received 1,600 By Furniture purchased 32,00

To Entrance Fees 1,800 (11,160 + 2800 + 1240

To sale of furniture - 12,000)

(2800 - 1000) By salaries 8140

(7800 + 480 – 140)

By Rent
(1800 + 200 – 320)
1680
By printing 300

By Insurances (200 + 60) 260

By Games & Sports 1,400

By Misc, expences 5,800

By closing balance
Cash in hand 340
Cash in hand 2900
3,240
32,220 32,220

Illustration – 7 :
Secunderabad club had the following assets and liabilities as on 1-1-2007. cash in hand Rs
12,000, subscription receivable Rs 12,00. Furniture Rs 6000, Sports material Rs 3600. Investments Rs
15,000, buildings Rs 30,000 outstanding for supplies Rs 1,800 and capital fund Rs 66,000 During the
year 2007 the club did the following business.
Subscriptions received (including the arrears) Rs 18,000 subscriptions due Rs 18,00 paid to the
outstanding creditors for supplies, subscriptions to News papers Rs 3000, Sports material purchased
Rs 6,000, sale of old newspapers Rs 300, meeting expenses Rs 2,700; lighting charges Rs 2,400 salaries
of establishments RS 6,000 stocks of sports material at the end Rs 3,000 interest received on investment
 Centre For Distance Education 2.12 Acharya Nagarjuna University

RS 450 (outstanding Rs 150) Borrowing Rs 12,000, donations received Rs 10,800 (hay to be

capitalised) provide depreciation at 5% on furniture and buildings
Prepare a Receipts and payment amount an Income and expenditure amount for the year 31st
Dec 2007, and a Balance sheet as on that date.
Secundrabad club Receipts and payment Account for the
year ended 31-12-2007
Dr Cr
Receipts Amount Payments Amount

Rs Rs

To Balance b/d 12,000 By outstanding creditors 1800

To Subscriptions 18,000 for supplies

To Sale of old news paper 300 By subscription to news papers 3,000

To Interest on investments 450 By purchase of sports materials

To Borrowings 12,000 By meeting expenses 6,000

To Donations 10,800 By lighting charges 2,700

By salaries of establishment 6,000

By purchase of furniture 2,400

By Annual function expenses 2,250

By Balance c/d` 27,000

53,550
53,550
Income and expenditure Account for the year 31-12-2007
Dr Cr
 Advanced Accounting 2.13 Non – Profit Organisations - II
Buildings 1500 1,800
To Surplus 150
24,900

Dr Balance sheet as on 31-12-2007 Cr

Expenditure Amount Income Amount
Rs Rs

To subscription to By subscription

News papers 3000 (18000 + 1800 – 1200) 18,600

To sports materials used
(6000 + 3,600 – 3,000)
6,600 By sale of old News papers 300
To Meeting expenses 2,700 By interest on investments 600
To lighting charges 2,400 By Donations 5,400
To salaries of establishment 6,000

To functions expenses 2,250

To annual function expenses
To Depreciation on
Furniture 300

Liabilities Amount Assets Amount

Rs Rs

Borrowing 12,000 Cash in hand 27,000

Capital fund 66,000 Subscriptions due 18,00

Add surplus 150 Furniture 8,100

Donations 5,400 71,550 (6000 + 2400 – 300)

Stock of sports material 3000
Investment 15,000

Accured Interest 150

Buildings (30,000 - 1,5000) 28,500

83,550 83,550

2.4 SUMMARY :
Non trading concerns Income and Expenditure account is accompanied by the Balance sheet like
in case of Trading concerns. Capital Fund appear in the Balance sheet of Non-Trading concerns is
similar to capital Account of Trading concerns, Non - trading concerns do not have formal capital like
that of Trading concerns. The Exceed of income over expenditure and capital receipts or receipts that
are capitalised are accumulated under the heading “Capital fund” and shown as liability in the Balance
sheet. While preparing Final accounts of Non - Trading organisations special items like legacies
 Centre For Distance Education 2.14 Acharya Nagarjuna University
Donations Endowment fund, general fund , special fund Entrance fees, Honorarium etc should be given
importance.
2.5 SELF ASSESSMENT QUESTIONS :
1. Explain the meaning of the following terms
a. Legacies
b. Donation for specific purpose
c. Life member ship fees
d. Entrance fees
e. Endowment fees.
f. Receipts for tournament fund.
2. How will you prepare the Balance sheet both at the beginning and at the end of the
accounting period from a given Receipts and payments Account and an income and
Expenditure Account.
3. What special items are considered while preparing accounts of Non-trading Concerns?
4. What is legacy ?
5. How will you treat the following items while preparing final accounts of non-trading
concerns ?
a) Specific donations
b) Entrance fees
6. How do you convert Income and Expenditure account into Receipts and Payments
account?

2.6 EXCERCISES :

1. From the following Trial Balance prepare an Income and Expenditure Account of the Mumbai
club for the year ended 31-12-2007 and a Balance sheet as on that date.
Depreciate furniture by 10% billards tabels and accessories by 20% China glass cuttlery etc.
by 33 1/3. of the subscriptions Rs 2,400 is paid in advance and Rs 1500 is in arrears Rs 1,800 is owing
for salaries to staff.
Debit Credit

Rs Rs

Furniture 15,000 Members subscription 63,360

Billiards table
(brought in 2005) 7500 Sundry receipts from
Chinaglass cuttlery 1998 Billiards etc 10,458
Repairs 4404 Sale of Tickets for

Salaries and wages 13,572 entertainment 19,404

Rent and Telephone 19,164 Sundry creditors 15,600
Fuel and light 9,708 Entrance fees 2,688
Cost of entertainment 13,140 capital fund 24,000
Sundry expences 9,600
 Advanced Accounting 2.15 Non – Profit Organisations - II
Cost of annual dinner 4,560

Sundry debtors 7020

Cash at bank 28,800

Cash in hand 1,044

1,35,510 135,510
2. From the following receipts and payments account for the year ending 31-12-2007 prepare an
income and Expenditure account for the period ending 31-12-2007 and a Balance sheet as on
that date.
Receipts Rs Payments Rs
To Donations 35,000 By salaries 37,500
To subscriptions 1,15,000 By Help to poor 37,000
To life membership fees 50,000 By Expenses on free

To Legacy 75,000 dispensary 34,500

To Interest received 4000 By postage & stationery 3,500
By Furniture 50,000

By Investments 75,000

By Cash in hand 41,500

2,79,000 2,79,000
Additional Information :
1. Subscriptions outstanding for the current year Rs 5,000.
2. Salaries unpaid Rs 5,000
3. Help to poor students promised but unpaid Rs 16,000
4. Expenses of dispensary outstanding Rs 3,000
5. Postage and stationery expenses yet to be paid Rs 4,000

3. Prepare Income and Expenditure account and Balance sheet for 2007 from the Balance sheet and
Receipts and payments account.

Balance sheet As on 31-12-2007

Liabilites Amount Assets Amount

Rs Rs
Capital Fund 13,448 Building 12,000
Subscriptions received Outstanding subscriptions 152

in advance 240 Outstanding lockers rent 96

Out standing expenses 560 Cash 4000
loan 2,000

16,248 16,248
 Centre For Distance Education 2.16 Acharya Nagarjuna University

Receipts and Payment Account for the year ended 31-12-2007

Rs Rs

To Balance 1-12007 4,000 By Expenses 2006 480

2007 800
To Subscriptions : 2006 80 By Land 1,600
2007 840 By Interest 160
2008 40 By Mic. expenses 800
To Entrance fees 320
To Lockers rent 280 To Balance c/d 3,320
Misc. Income 1600
7,160 7,160

Guntur sports club started on 1-1-2007,

Their Receipts and payment A/c for the
year 2007 is given below. Receipts Rs Payment Rs
To Donations 50,000 By Buildings 40,000
To Entrance fees 4000 By Tournment expenses 900
To Tournament Fund 10,000 By Furniture 2,100
Revenue receipts By Revenue Payments

To Subscriptions By
salaries
(including Rs.100 for
2008)By cricket
expenses
To rent By Insurance
To other receipts By
gardener
To Cricket fees By
Investments
By
Balance
c/d
 Advanced Accounting 2.17 Non – Profit Organisations - II
To Subscriptions By salaries
(including Rs.100 for 2008)By cricket expenses
To rent By Insurance
To other receipts By gardener
To Cricket fees By Investments
By Balance c/d

Additional Information :
1. Subscriptions receivable for the year 2007 Rs 300/-
2. Salaries un paid Rs 170/-
3. Entrance fees are to be capitalised
4. Insurance include 9 months premium for 2008.
4. From the following particulars prepare Income and Expenditure account Rs.
Fees collected (Including Rs.24,000
on account of last year) 2,24,000
Fees for the year outstanding 40,000
Salary paid (including Rs.2,400 on
account of last year) 19,200
Salary outstanding 3,200
Entertainment expenses 4,000
Tournament expenses 8,000
Meeting expenses 16,000
Travelling & Conveyance 6,400
Purchase of books 16,000
Periodicals 8,000
Rents 9,600
Postage, Telephone and Telegrams 13,600
Printing and Stationery 4,000
Donations received 6,400
(Ans : Surplus Rs.1,56,800)
5. Following is the Receipt and Payments account of Visakapatnam cultural club for the
year ended 31-12-2000.
Dr. Cr.
Receipts Rs Payments Rs
To Donations 25,000 By Salaries 900
To Life membership 2,000 By Cricket 300
 Centre For Distance Education 2.18 Acharya Nagarjuna University
To Sports competition fund By Tennis
To Subscription By Inusrance
(including Rs.50 for 2001)By Garden maintenance
To Locker rent By Printing
To Interest on securities By Telephone
To Cricket By Investments
To Tennis By Balance c/d
To Billiards

Subscriptions receivable for 2000 Rs.150, outstanding salaries Rs.100. Half of the
donations are to be capitalised, accrued interest Rs.300, Prepaid insurance Rs.30.
Prepare Income and Expenditure Account for the year ended 31-12-2000. (Ans :
Surplus Rs.13,155)

6. The Receipts & Payments account of the Hyderabad Friends Club for the period ending 31st
December, 2000 is given below.
Receipts Rs Payments Rs

To Donates received 25,000 By Buildings 20,000

To Reserve fund (Being By Furniture 1,050

life numbers fees received) 2,000 By Tournament Expenses

quadrangular match fund 5,000 quadrangular matches 450

Revenue Receipts Revenue payments

To subscriptions (including By salaries 900

Rs. 50 for 2001) 1,600 By Cricket 300

To Lockers rent 50 By Tennis 270
To interest on securities 50 By Insurance (Paid up

To cricket 200 30th September 2001) 180

To sundries 25 By Gardening 85
To Tennis 175 By Printing 15
To Billiards 100 By Telephone 125
By sundries 75

By Investments (at cost) 9,000

By Balance c/d 1,750

34,200 34,200
Subscription fees outstanding for the year 2000 was Rs. 150. Salaries up paid for 2000 Rs, 85, From
the particulars given above prepare an Income and Expenditure account of the club for the year ended
31st December, 2000 and the Balance Sheet as on that date.
(Ans : Excess of income Over Expenditure, Rs. 400, Balance Sheet Total Rs. 32,085)
7. Tarakarama Sports Club’s Receipts and Payments amount for the year ending 31st Dec.,20000
is given here under.
 Advanced Accounting 2.19 Non – Profit Organisations - II

Additional information.
1. Subscriptions receivable for 1999 Rs. 1,000 and for 2,000 Rs. 1,050
2. Games equipment in the beginning was Rs. 250 for 2001.
3. Provide depreciation at 10% on Gras cutting machine.
Prepare Income and Expenditure account for the year ending 31st Dec., 2000 and opening and
closing Balance sheet.
(Ans : Excess of Expenditure Over Income Rs.2,550 Capital fund Rs. 4,500 Balance sheet Total
Rs. 9,200)
8. Prepare the final a/c of Hyderabad Club from the particulars given below for the year ending31-
12-2000.
Receipts Rs Payments Rs

To Balance b/d 1,200 By Salaries 6,500

To Subscriptions By Rent 1,200

(including 400 for 2001) 6,400 By Printing & Stationery 180

To Interest on investment By postage 50

(Investment cost Rs.40,000) 2,500 By Cycle purchase 800

To Bank interest 50 By Govt. Bands 1,000
To Sale furniture 500 By Balance c/d. 920
10,650 10,650

Adjustments
Subscriptions received included Rs.200/-of 1999
Rent paid included Rs.100/- for Dec.,1999.
Subscriptions due for 2000 Rs. 300/-
Salaries payable Rs. 600/-
 Centre For Distance Education 2.20 Acharya Nagarjuna University
Cost of Furniture sold was Rs.640/-
(Ans : Excess of Income over Expenditure Rs. 80 Capital Fund Rs. 14,940 Balance Sheet Total Rs.
43,020)
9. From the following Receipts and Payments account and other information of City Club,prepare
Income and Expenditure account as on 31-12-2000 and Balance Sheet as on that date.

Adjustments :
1. Subscriptions received include Rs. 1,200 - for the year 1999 and Rs.2,400/- for the
year2001.
2. Subscriptions due for the year 2000 - Rs.1,800/-
3. Printing charges payable for 2000 - Rs.240/-
4. Salaries payable for 2000 - Rs. 3,600/-
Receipts & Payment Account on 31-12-2000

Receipts Rs Payments Rs
1.1.2000 By Salaries 39,000

To Balance of By Rent 7,200

Cash 1800 By printing and stationary 1,080

Bank 5400 By postage 300

7,200 By Purchase of a cycle 1,800

31-12-2000 By Purchase of Govt. Bonds 9,000

To Subscriptions 38,400 31-12-2000

To interest on investments 15,000 By Balance C/D

To Bank interest 300 Cash 180

To sale of furniture 3,000 Bank 5,340

(Cost of furniture 5,520

on 1-1-2000 Rs. 3,840) 63,900 63,900

(Ans: Excess of Expenditure over Income - Rs. 360, Capital Fund - Rs 12,240 Balance Sheet Total -
Rs. 18,120)
10. From the under mentioned Receipts and Payment account for the year ending 31-12-2000 of
French Recreation Club, prepare Income and Expenditure account and Balance Sheet as on that date.
Receipts and Payments Account (For
the year ended 31-12-2000)
Receipts Rs Payments Rs

To Balance b/d (Bank) 25,000 By purchase of furniture (1-4-200) 5,000

To subscriptions By salaries 2,000

1999 1,500 By Telephone expenses 300

2000 10,000 By Electricity charges 600

 Advanced Accounting 2.21 Non – Profit Organisations - II
2001 500 12,000 By postage and stationery 150
To Donations 2,000 By Purchase of books 2,500
To Rent 300 By Entertainment expenses 900
To Interest on bank deposits 450 By Purchase of Govt. Bonds 5%

To Entrance fee 1,000 (1-7-2000) 8,000

By Miscellaneous expenses 600

By Balance c/d :
Cash 300
Bank 20,400 20,700
40,750 40,750
The following additional information is available :
1. Salaries outstanding Rs, 1,500.
2. Entertainment expenses outstanding Rs 500
3. Bank interest receivable Rs. 150
4. Subscriptions accrued Rs. 400
5. 50% of entrance fee is to be capitalised.
6. Furniture is to be depreciated at 10% (per annum).
(Ans : Excess of Income over Expenditure - Rs. 7,075 Capital Fund Rs. 26,500, Balance sheet
Total Rs. 36,575)
11. The following is the Receipts and payments statement of the Secunderabad sports Club for the
year ended 31st December, 2000

Receipts Rs Payments Rs

To Balance 1-1-2000 2,400 By Secretary’s salary 3,600

To Entrance fees 500 By Up-keeps of grounds (c) 2,100
To subscriptions (a) 8,700 By Wages of grounding (d) 2,400
To proceeds of By found rent 150

Concerns 1,500 By Sundry repairs 175

To Interest on (b) By Printing and postage 200

Investment 500 By Balance 31-12-2000 4,945

13,600 13,600

a) This item included subscriptions outstanding brought over from previous year, Rs. 300
b) This item includes Rs. 150 in respect of interest accrued in the preceding period.
c) This item includes Rs. 400 applicable to the previous year.
d) This item includes Rs. 200 applicable to the previous year.
Other ledger balance at the commencement of the financial period were :
Capital fund Rs. 40,100 Income and Expenditure account Credit Balance brought forward Rs.
8,900, Club premises and Grounds (as per valuation) Rs. 31,000, Investments Rs. 10,000, Sports
material Rs. 2,450, Furniture and Fixtures Rs. 4,000, Books - Rs. 300.
 Centre For Distance Education 2.22 Acharya Nagarjuna University

From the above particulars, prepare a Balance sheet at the commencement of the period, and
income end Expenditure account for the period, and a Balance Sheet as the close of the period.
Entrance fees are to be capitalised. The outstanding labilities on 31st December, 2000 were
wages Rs. 200 and Printing Rs. 100. Interest occurred and outstanding on investments was Rs 120.
Depreciate Club premises by 2 per cent, Furniture by 5 per cent and sports Equipment by 331/ 3 percent.
(Ans : Excess of Income over Expenditure Rs. 428. Balance sheet total Rs. 50,228)
12. The receipts and payments account of the Hyderabad Athlete, Society, for the year ending 31st
December, 2000 is given below. In the Society’s ledger, the following balance are found on the date.
Rs.
Capital account (Donations etc.) 30,000
Club House and grounds 18,000
Investments at cost 8,000
Furniture & fittings 4,500
Income & expenditure (Cr.) 2,500
Receipts and payment Account for the year ended 31st December, 2000

Receipts Rs Payments Rs
To Balance 1-1-2000 2,085 By Upkeep of grounds 3,300 To subscriptions 7,200 By Secretary’s
salary (c) 2,400 To Entrance fees 320 By Wages of groundman (d) 2,800
To proceeds of By ground rent 150 Lectures 3,500 By Sundry repairs 140 To Interest on By Printing
and postage 80
Investment 360 By Balance 31-12-2000 5,595

13,465 13,465

a) This item includes Rs 400, in respect of subscriptions brought over from previous year.
b) This item included Rs. 90, by way of interest occurred in the previous year.
c) This included Rs.400 applicable to the previous ear.
d) This item included Rs. 175, which relates to the previous year.
Other adjustments are :
1) Entrance fees are to be capitalised.
2) Charge 10% depreciation on furniture and 2 percent of club house and grounds.
From these particulars, prepare the final accounts of the Society for the yea 2000.
(Ans Excess of Income over Expenditure Rs. 2,465, Balance Sheet Total Rs. 35,285.) 13.
The following particulars related to Cucullate club. Income and Expenditure Account
(For the year ended 31-12-2000)
Receipts Rs Payments Rs
To Salaries 4,800 By Entrance fees 36,000
To subscriptions 6,300 By Subscriptions 42,300
To Advertising 5,400 By Rent 12,000
To Audit fees 900
 Advanced Accounting 2.23 Non – Profit Organisations - II
3,000
To Fire insurance
To Depreciation 24,000

To Excess of Income over

Expenditure 45,900
90,300 90,300
Receipts and Payment Account
(For the year ended 31-12-2000)
Receipts Rs Payments Rs
To Balance b/d 12,600 By Salaries 3,600
To Entrance fees 36,000 By Printing & Stationery 7,500
To Subscriptions By Advertising 5,400

1999 1,800 By Fire Insurance 3,600

2000 40,500 By Investments 60,000
2001 1,200 By Balance c/d 22,500
To Rent received 10,500

1,02,600 1,02,600
The assets on 1-12000 included land and buildings Rs. 1,50,000, sports equipment Rs. 75,000,
Furniture Rs. 12,000, Subscriptions in arrears on that date were Rs. 2,400, Subscriptions in arrears on
31-12-2000 amounted to Rs. 1,800.
Prepare Balance sheet as at 31-12-2000.
(Ans Capital fund the being Rs.2,52,000 B/s total Rs. 3,01,200)
14. From the following information given the books of a sports club, prepare the Balance sheet as
on 31-12-2000.
Receipts and Payment Account for the year ended 31-12-2000.
Receipts Rs Payments Rs

To Balance b/d 16,800 By Salaries 32,600

To Entrance fees 8,000 By Printing & Stationery 80,000
To Subscriptions By Advertising 2,000

1999 2,400 7,200

2000 40,500 By printing & Stationery 60,000

2001 1,200 (including Rs.1,200 22,500
of the previous year)
By Insurance Premium 4,800
By Balance c/d 10,800

To Interest received 8,000

1,36,800 1,36,800
 Centre For Distance Education 2.24 Acharya Nagarjuna University

Income and Expenditure Account for the year ended 31-12-2000.

Receipts Rs Payments Rs

To Salaries 33,600 By Subscriptions 1,02,000

To Advertising 2,000 By Entrance fees 8,000
To Printing & Stationery 6,000 By Interest received 8,000
To Audit fees 4,000

To Insurance premium 4,000

To Depreciation 24,000

on sports - equipment 30,000

Furniture 1,600

To Excess of over
Expenditure
45,900
1,18,000 1,18,000

Assets of the club on 1-1-2000 including Sports equipment Rs. 1,00,000, Ground and pavilion
Rs. 1,60,000 and Furniture Rs. 16,000. Subscription in arrears on that date was Rs, 3,200 and
subscription received in advance was Rs. 1,000.
(Ans : B/s Total Rs 3,37,800; Opening capital fund Rs 2,93,800) 15.
Andhra Cricket club gives you the following information.
Income and Expenditure Account for
the year ended 31-12-2000.
Expenses Amount Income Amount
Rs Rs

To Remuneration 9,000 By Donation and

To Salaries and wages 12,000 Subscription 51,000

To Rent 6,000 By Barroom receipts 12,000

To Repairs5,500Less expenses 10,000 2,000 To

Miscellaneous expenses3,500By Bank Interest1,000 To Honorium to
secretary9,000By Hire of club hall6,000
To Depreciation on equipment2,500
To Surplus12,500
60,00060,000

Balance Sheet as on 31-12-2000.

1999 Labilities 2000 1999 Assets 2000
Rs Rs. Rs. Rs.

Capital Fund as 12,500 Equipment 10,000

 Advanced Accounting 2.25 Non – Profit Organisations - II
On 31-12-99 24,000 Outstanding

Entrench fee 5,000 3,000 Subscription 4,000

24,000 Surplus 12,500 41,500 2,500 Cash in hand 2,000

Subscription in 1,250 Cash at bank 5,000

2,000 advance 15,00 10,000 Fixed deposits 25,000

Outstanding expenses
750 Miscellaneous 500

1,000 Salaries and wages 1,500

Honorarium to
1,500 Secretary 1,000

29,250 46,000 29,250 46,000

Prepare the Receipts and payments Account of the club for the year ended 31-12-2000.
(Donations subscriptions received Rs, 49,500, Salaries and wages paid Rs. 11,500, Misc.
expenses paid Rs. 3,750, Honorarium to secretary paid on 9,500).

2.7 SUGGESTED READINGS :

Financial Accountancy : Shukla Grewal

Financial Accountancy : Jain and Narang
Financial Accountancy : R.L. Gupta & V.K. Gupta

Dr. Ch. Suravinda

 LESSON - 3
SINGLE ENTRY SYSTEM - I
OBJECTIVES : After going through this lesson the student can know a different system of
accounting, (other than double entry) which is usually adopted by small proprietors, traders and
professional people, famously known as single entry system of accounting.

STRUCTURE OF THE LESSON :

3.1 Introduction.
3.2 Definition
3.3 Features
3.4 Difference between single Entry and Double Entry
3.5 Defects of single Entry.
3.6 Methods of ascertaining profit
3.7 Preparation of statement of Affairs.
3.8 Differences between statement of Affairs and Balance sheet.
3.9 Statement of Affairs or Net worth Method.
3.10 Summary
3.11 Self Assessment Questions
3.12 Exercises.
3.13 Suggested Books

3.1 INTRODUCTION :
Single Entry system is the method of maintaining accounts which does not exactly follow the
principles of double entry system. Under this method the principles of the double entry system are not
being followed for all transactions, that means both the aspects of certain transactions are recorded
while only one aspect is recorded for certain transactions. Under this methods usually the personal
accounts of the debtors and creditors are kept and real and nominal accounts may not be maintained in
the books. Small traders general merchants, medical practitioners, lawyers and other professional
people usually adopt this system joint stock companies cannot adopt this system because they are
required to maintain complete records of all transactions under the companies Act 1956.

3.2 DEFINITION :
Kohler defines it as “A system of book - keeping in which as a rule only records of cash and of
personal accounts are maintained, it is a always incomplete double entry varying with circumstances”.
Thus single entry is not any practical system of accounting but rather the double entry system in
an incomplete and disjoined form.

There are two types of single entry.

1. Pure single Entry : Under this system only the personal accounts of the debtors and
creditors are kept, all real and nominal accounts are not maintained.
2. Single Entry in the popular sense: This method of single entry along with personal
accounts of Debtors and creditors, real accounts like cash and bank accounts are
maintained.
 Centre For Distance Education 3.2 Acharya Nagarjuna University

3.3 FEATURES :
Single entry system has the following features :
1. Books according to this system can be kept only by a sole trader or by a partnership firm.
Joint stock companies cannot keep books on single entry system.
2. In this system it is very common to keep only personal accounts and to avoid real and
nominal account.
3. It is vert common in this system to keep one cash book which mixes up business as well
as private transactions.
4. Under this system for any information one has to depend on original vouchers, For
example in the case of credit sales, the proprietor may keep the invoice without recording
it any where and at the end of the year the total of the invoices gives an idea of total credit
sales of the business.
5. This system lacks uniformity as it is a mere adjustment of double entry system according
to the convenience of the person.
6. It is difficult to prepare trading, profit and loss account and balance sheet due to the
absence of nominal and real accounts in the ledger.

3.4 DIFFERENCE BETWEEN SINGLE ENTRY AND DOUBLE ENTRY :

The following are the main differences between these two systems

Single Entry Double Entry

1. It is an incomplete record of final 1. It is a complete record of the financial
transactions transactions
2. Under this system only personal accounts 2. All accounts personal as well as in personal
are maintained. are maintained in the double entry method.
3. As the books are maintained
3. Books maintained by the single entry systematically, they are reliable.
system are not reliable because a complete
record of transactions is not maintained.
4. Due to lack of complete record of 4. Trial Balance can be prepared under this
transactions trial Balance can not be system.
prepared to check arithmetical accuracy.
5. In the absence of nominal accounts a 5. Profit and loss account can be prepared
Trading and profit and loss Account can because a complete record of all
not be prepared to ascertain profit. transactions is available in the books.
6. As The information regarding Assets is not 6. Under this system a complete record of real
available, we cannot prepare the Balance accounts is available so we can prepare the
sheet. Balance sheet.

3.5 DEFECTS OF SINGLE ENTRY :

Single entry system is an incomplete system of accounts. Hence it suffers from the following
defects or limitations.
 Advanced Accounting 3.3 Single Entry System - I

1. This system is an unscientific method of accounting.

2. It does not record both the aspects of a transactions therefore at the end of the year
arithmetical accuracy of the books cannot be checked by preparing a trial balance.
3. In the absence of check the possibility of fraud or misappropriation is grater in case of
single entry than in the case of double entry system.
4. In the absence of nominal accounts, trading and profit and loss account can be prepared to
ascertain profit or loss.
5. In the absence of real accounts. It is not possible to know the exact financial position of
the business on any particular day by preparing a Balance sheet.
6. No correct price of the business is available and thus it is a set back at the time of sale of
the business.
7. Information obtained from the records cannot be relied upon because of lack of test and
free from doubt.
8. It is difficult to get loans from banks and other financial institutions as proper and reliable
balance sheet is absent.
9. Financial strength or soundness of the firm cannot be judged because true and reliable
figure of net profit or asset and liabilities is not available.
10. It is very difficult to ascertain the value of goodwill of the business.
11. The proprietor cannot know the progress made by the business over past year as the figures
of sales and net profit and rate of net profit on sales cannot be known.

Inspite of the above defects the single entry method of maintaining accounts is quite popular with small
firms which cannot afford to spend money on maintenance of accounts under double entry.

3.6 METHODS OF ASCERTAINING PROFITS :

In the absence of real accounts in the books maintained on the single entry it is not possible to
prepare the Balance sheet of the business. Similarly in the absence of nominal accounts profits cannot
be calculated by preparing trading and profit and loss account. Therefore to find the profit of a period
and to judge the financial position of the business we can adopt any of the two methods.
a. Statement of Affairs or net worth Method.
b. Conversion Method. The working of both the methods has been discussed one after the
other.

3.7 PREPARATION OF STATEMENT OF AFFAIRS :

The following points should be considered while preparing statement of Affairs.
1. The cash book should be balanced. Cash in hand should be verified with the balance as
shown by the cash book.
2. The bank balance as per cash book should be reconciled with the pass book balance.
3. The list of debtors and creditors should be prepared from the personal accounts maintained
in the ledger.
4. Stock in trade should be taken and valued at cost or market price whichever is lower
5. The values of fixed assets should be ascertained from the information as may be available.
 Centre For Distance Education 3.4 Acharya Nagarjuna University

6. Depreciation if any on fixed assets should be provided.

7. All out standing expenses and incomes should be considered and shown in statement of
Affairs.
8. Expenses paid in advance and incomes received in advance should also be provided and
shown in the statement of Affairs.
9. The excess of assets over liabilities will represent the capital on that date.

3.8 DIFFERENCE BETWEEN STATEMENT OF AFFAIRS AND BALANCE

SHEET:
The purpose of preparation of both the statements is to show the financial position of the business
on a particular date but there are certain differences between these two, those can be explained as
follows.

Statement of Affairs Balance sheet

1. The Financial position disclosed by the 1. Financial position disclosed by the Balance
Statement of Affairs is not reliable. Sheet is reliable.
2. It is prepared with the information 2. It is prepared with balances extracted from
Available in the incomplete books. Books maintained on the double entry
system.
3. It helps in ascertainment of trading profit 3. The primary purpose of a Balance sheet is
Or loss for a particular period, as well as to show the financial position of the
The financial position on a particular business on a particular date.
Date.
4. Due to incomplete record there is a 4. No fact is omitted or committed because
Possibility of omission of some facts. Complete record for the transactions
Takes .

3.9 STATEMENT AFFAIRS OR NET WORTH METHOD :

Statement of Affairs method is one of the methods of ascertaining profits under the single Entry
system. Trading and profit and loss account cannot be prepared from books maintained on single entry
basis because nominal accounts are not maintained in the ledger. Hence we prepare a statement of
affairs for the purpose of calculation of profits. The following procedure is followed:
1. First of all, a statement of affairs at the beginning of the year is prepared to determine the
amount of capital at the beginning of the year.
2. Similarly, a statement of Affairs at the close of the year is prepared to determine the
amount of capital at the end of the year.
3. Drawings are added to the capital at the end because drawings made during the year can
reduce capital at the end.
4. Similarly capital introduced during the year should be deducted from the capital at the end
for the reason that the capital at the end would have been less by that amount if such
addition to the capital is not made during the year.
5. Capital at the beginning of the year as ascertained in step one should be deducted from the
adjusted capital ascertained in step four and the difference will be either a trading profit
 Advanced Accounting 3.5 Single Entry System - I

or ;loss. If the adjusted capital at the end exceeds will be profit for the year. If the adjusted
capital at the end of the year is less than the capital at the beginning of the year, the
difference will be loss for the year.
6. Interest on capital and interest on drawings is adjusted to profit or loss to arrive at the net
profit or loss for the year.
This can be betterly understood with the following illustration.
Illustration I
Arun keeps his books on the single entry system and the following information is available.
1st Jan 2007 31st Dec 2007
Rs. Rs.
Furniture 4,000 4,000
Stock 56,000 61,000
Sundry Debtors 42,000 68,000
Cash 3,000 4,000
Sundry creditors 35,000 38,000
Bills payable ------ 6,000
loan ------ 10,000
Investments ------ 20,000
He has drawn out of the business Rs 10,000 during the year.
Prepare a statement showing his profit for the year ended 31st December 2007 after writing off
10% depreciation on furniture and making a provision for bad debts of 10% on sundry debtors.
Solution:
Statement of Affairs of Mr. Arun as on 1-1-2007
Liabilities Amount Assets Amount
Rs Rs
Sundry creditors 35,000 Cash 3,000

Capital Account 70,000 Sundry debtors 42,000

(Balancing figure) Stock 56,000

Furniture 4,000

1,05,000 1,05,000

Statement of Affairs of Mr. Arun as on 1-1-2007

Liabilities Amount Assets Amount
Rs Rs
Bills payable 6000 Cash 4,000
Sundry creditors 38,000 Investments 20,000
Loan 10,000 Sundry Debtors 68,000
 Centre For Distance Education 3.6 Acharya Nagarjuna University

Capital Account 95,800 Less Provision 6,800 61,200

(Balancing figure) for bad debts
Stock 61,000
Furniture 4,000
Less Depreciation 400 3,600
1,49,800 1,49,800

Statement of profit of Mr. Arun for the year ended 31st December 2007 Rs.
Capital at the end of the year 95,800
Add : Drawings during the year 10,000
1,05,800
less : Capital at the beginning of the year 70,000
Profit for the year. 35,800
Illustration 2 :
Varun keeps his books by the single Entry method. His position on 31st March 2007 was as
follows.
Cash in hand Rs 7,200; cash at Bank Rs 76,500 Debtors Rs 55,200; stock Rs 85,800 Furniture
Rs 15,000; creditors for goods Rs 56,100 Expenses outstanding Rs 6,000
On 1st october, 2007, varun introduced Rs 30,000 as further capital in the business and withdrew
on the same date Rs 21,000 out of which he spent Rs 15,000 on the purchase of a machine for the
business on 31st March 2008 his position was as follows :
Cash in hand Rs 6,300; cash at bank Rs. 82,500; stock Rs 94,500; Debtors Rs 72,600 Furniture
Rs 18,000; creditors Rs 75,600; prepaid Insurance Rs 600.
Prepare the necessary statement showing the profit or loss made by him during the year ended
31st March 2008 after making the following adjustment. Depreciate Furniture and Machine @ 10% p.a
; baddebts Rs.3,600 for doubtful debts @5%. Goods taken for personal use amounted to Rs.4,500. Also
provide interest on capital @ 10% p.a.
Solution :
Statement of Affairs of Varun as on 31st March 2007.
Liabilities Amount Assets Amount
Rs Rs
Creditors 56,100 Cash in hand 7,200
Expenses outstanding 6000 Cash at Bank 76,500
Capital 1,77,600 Debtors 55,200
(Balancing figure) Stock 85,800
Furniture 15,000

2,39,700 2,39,700
Statement of Affairs of Varun as on 31st March 2008.
Liabilities Amount Assets Amount Amount
 Advanced Accounting 3.7 Single Entry System - I

Rs Rs. Rs

Creditors 75,600 Cash in hand 6,300

Capital 20,4,450 Cash at Bank 82,500

(Balancing figure) Stock 94,500

Debtors 72,600

less Bad debts 3,600

69,000
less Provision 3,450 65,550

Prepaid Insurance 600

Furniture 18,000

less Depreciation
on 1,5000 for
1year 1500
on 3,000 for
1/2year 150 1650 16,350
Machinery 15,000

less Depreciation 750

for 1/2 year
14,250
2,80,050 2,80,050

Note : Date of purchase of new furniture is not given in the question, so depreciation on this
furniture has been charged for half year.

Statement of Profit of Varun as on 31st March 2008.

Amount Amount

Rs. Rs.

Capital as at the 31st March 2008 204450

Add Drawings 6000

Cash (21000 - 15000) goods less 4500 10500

Additional capital introduced 214950
30000
less capital as at 1-4-2007 profit 184950
before allowing interest 177600
7,350
 Centre For Distance Education 3.8 Acharya Nagarjuna University

on capital
less Interest on capital @ 10% p.a on
Rs 1,77,600 for 1year. 17760
on Rs 30000 for 1/2 year. 1500 19260
loss for the year. 11910

Illustration 3
Nalini, Rajani, sujani were in partnership and towards the end of 2007 most of their books and
records were destroyed in the fire. The Balance sheet as on 31st December. 2006 was as follows:
Rs Rs

Creditors 22,000 Cash 9,600

Capital Debtors 14,400

Nalini 18,000 Stock 26,000

Rajini 12,000 Machinery 5,760

Sujani 6,000 36,000 Fixtures & Fittings 2,400

Current A/cs:
Nalini 580 Currant Account
Rajini 400 980 Sujani 680
58,980 58,980

The partners drawing during 2007 have been proved at A- Rs 5600, B- Rs 4000 and C-Rs 2,600.
on 31st Dec, 2007 the cash was Rs 12,800, Debtors Rs 16,100, stock Rs 2360 Advance payments Rs
100 and creditors Rs 24,160. Machinery is to be depreciated by 10% per annum and Fixtures and fillings
at 71/2%. 5% Interest is to be allowed on capitals. The partners share profits in the proportions of 1/2,
1/3 and 1/6.
You are required to prepare a statement showing the net trading profit for the year 2007 and the
division of the same between the partners, together with the Balance sheet as on 31st December 2007.

Statement of affairs of M/s Nalini, Rajani, Sujani as at 31st December 2007

Liabilities Amount Amount Assets Amount Amount
Rs Rs Rs Rs
Creditors Cash 12,800

Capitals 24,160 Debtors 16,100

Stock 23,600

Nalini 18,000 Prepaid expenses 100

Rajani 12,000 Machinery 5,760

 Advanced Accounting 3.9 Single Entry System - I

Sujani 6,000 36,000 less Depreciation 576 5,184

Fixtures & Eittings 2,400

less Depreciation 180 2,220

Combined current 156
Account of
Nalini, Rajani, sujani
60,160 60,160

Statement of Profit of Profit & Loss

For the year ending 31st Dec 2007.
Amount Amount
Rs. Rs.
Combine of current Accounts of
Nalini, Rajani, Sujani on 31-12-07 -156
Add Drawings during the year:
Nalini 5600
Rajani 4000

Sujani less Combined current 2600 12200

Account 1-1-07 12,044

Nalini 580

Rajani 400

Sujani profit before -680 300

allowing interest 117,44

on capital
less Interest on capital @ 5% p.a
Nalini 900
Rajani 600

Sujani 300 1,800

Net profit made during the year 9,944
Divided among Nalini, Rajani Sujani as
follows :
Nalini - 1/2 of 9944
4,972
Rajani - 1/3 of 9944 3,316

Sujani - 1/6 of 9944 1,656

 Centre For Distance Education 3.10 Acharya Nagarjuna University

Balance sheet Nalini, Rajani and Sujani as at

31st December 2007.
Liabilities Amount Amount Assets Amount Amount
Rs Rs Rs Rs
Creditors 24,160 Cash 12,800

Capitals Debtors 16,100

Stock 23,600

Nalini 18,000 Prepaid expenses 100

Rajani 12,000 Machinery 5,760

Sujani 6,000 36,000 less Depreciation 5,184

Nalini Curent A/c Fixtures & Eittings 576
2,400

3.10 SUMMARY :
Small proprietors, traders and professional people usually adopt a system of keeping incomplete
book - keeping records, This is known as single entry system. Limited companies cannot adopt this
system of accounting. Under this system only personal accounts are kept. Real and nominal accounts
are generally not maintained. One cash book is kept in which business and private transactions of the
proprietor are mixed up. This system lacks uniformity. It is an adjustment of double entry system to
suit the convenience of a person. It is difficult to prepare final accounts in the absence of real and
nominal accounts. Single entry system is full of defects. Arithmetical accuracy of the books cannot be
checked by preparing a trial balance. Frauds are common under this system.

Profits can be ascertained under two methods. 1. Statement of Affairs or net worth Method 2.
Convertion method. Under networth method, to find out the capital on the opening and closing days,
the accounting equation “capital = Assets - Labilities to outsiders” is used and statement of affairs
prepared accordingly. Adjustments with regard to drawings, capital introduced, depreciation etc. are
made to closing capital and then true profit or loss is ascertained.
 Advanced Accounting 3.11 Single Entry System - I

3.11 SELF ASSESSMENT QUESTIONS :

1. What do you mean by single entry system ?

2. How does profit can be ascertained under single entry system.
3. What are the features of single entry system ?
4. Briefly describe the limitations of single entry system.
5. Distinguish single entry system from double entry system.
6. What is a statement of Affairs.
7. What are the differences between a statement of Affairs and a Balance sheet.
8. What are the methods of ascertaining profit under single entry system.

3.12 EXERCISES :

1. Kusuma a Retail merchant commenced business with a capital of Rs 75,000 on 1-12006.

subsequently on 1st May 2006, she invested a further sum of Rs 35,000 as capital in the business,
During the year he has with drawn Rs 15,000 for his personal use. On 31-122007 her assets and
liabilities were : cash at Bank Rs 30,000, Debtors Rs 40,000, stock of goods Rs 160,000,
Furniture’s Rs 20,000 and sundry creditors Rs 50,000 Ascertain profit or loss for the year 2006.

2. Subba Rao keeps books by the single entry system. Assets and liabilities on 31st December 2006
and 2007 were as under :

31 - 12 - 2006 31 - 12 - 2007

Cash in hand 1,200 1,800

Cash at Bank 1,800 12,000
Stock 1,20,000 1,14,000
Sundry debtors 51,000 84,000
Furniture 10,800 9,000
Plant and Machinery 90,000 1,62,000
Sundry creditors 1,32,000 1,74,000
During the year Subba Rao introduced Rs 30,000 as further capital in the business and with drew
Rs 4,500 per month.
From the above prepare a statement showing the profit or loss made by him for the year ended 31-
12-2007.
3. Chalapati kept their books on single Entry system their position on 31-12-2006 was as follows:
Cash in hand Rs 1400; cash at Bank Rs 21,000 stock Rs 14,0000! Sundry Debtors Rs 59,500;
Fixtures and Fittings RS 12,600; plant and Machinery Rs. 1,05,000; Sundry Creditors Rs
1,54,000.
Chalapati put Rs 3,5000 during the year as new capital and his drawings were @ Rs 5,250 per
month.
 Centre For Distance Education 3.12 Acharya Nagarjuna University

His position on 31st Dec 2007 was as follows:

Cash in hand Rs 2,100 : Cash at Bank Rs 14,000: sundry Debtors Rs 98,000 stock Rs 1,33,000
plant and Machinery Rs 1,89,000: Fixtures and Fittings Rs. 10,500 sundry creditors Rs 2,03,000.

From the above information prepare a statement of Affairs showing profit or loss during the year
31-12-2007.
4. Aravind commenced business on 1-1-2006 with capital of RS 2,00,000. He immediately bought
furniture for Rs 48,000 During the year he borrowed Rs 120000 from his wife and introduced a
further capital of his own amounting to Rs 76,000. He had withdrawn Rs 7200 at the end of each
month for family expenses. On 31st December 2006, his position was as follows.
Cash in hand Rs 4,800; cash at Bank Rs 62,400 sundry Debtors; Rs 1,15,200; stock Rs 1,63,200:
Bills Receivable Rs 38,400: sundry creditors Rs12,000; Rent due Rs 3600.
Furniture to be depreciated by 10% Ascertain the profit or loss made by Aravind during 2006.
5. Phalgun commenced business on 1st january 2007 with a capital of Rs 18,0000. Soon after he
bought furniture and fixtures for Rs 32,000. On 30th June 2007 he borrow Rs 90,000 from his
brother at 12% per annum (interest not yet paid) and introduced a further capital of his own
amounting Rs 2700. He withdrew @ Rs 5400 per month at the end of each month for household
expenses. On 31st December 2007 his position was as follows.
Cash in hand Rs 3600: Cash at Bank Rs. 46,800 sundry Debtors Rs 86,400: stock Rs 90,000:
Bills Receivable Rs 28,800: sundry creditors Rs 9,000 and owing for rent Rs 2,700.
Furniture and fixtures are to be depreciated by 10% Ascertain the profit or loss made by phalgun
during 2007.
6. Vijay commended business on 1st January 2007 with a capital of Rs 1,00,000 which he paid into
Banking Account opened for that purpose. On the same date he bought stock valved at Rs 65,000
and furniture which cost Rs 20,000. He kept his books on single entry basis. On 31st December
2007, stock was valued at Rs 83,000. There were book debts amounting to Rs 34,000 of which
Rs 2000 represented debts which were irrecoverable. Creditors amounted to Rs 36,000 and the
cash book showed a balance of Rs 16,500, but according to pass Book, the balance at vijays
credit was only Rs 14500 he having given his son Rs 2,000 and omitted to enter in the cash book.
Vijay with drew Rs 18,000 from the business for his private expences and in addition he used Rs
5000 worth of goods from his shop He took RS 10,000 as loan from his wife during the year.
Prepare a statement showing vijay’s profit or loss in the business for the year ended 31-122007
from the above information.
7. Sobhan and Bharat are equal partners in a business in which the books are kept by single entry.
The position of affairs on 1st January was as follows:
Liabilities Rs Assets Rs
Bills payable 12,920 Cash in hand 540
Sundry creditors 40,580 Cash at bank 4,400
Capital Accounts Bills Receivable 8,140
Sobhan 1,46,800 Sundry Debtors 97,360
Bharat 1,46,800 Stock 65,700
Plant 1,60,360
Furniture 10,600
3,47,100 3,47,100
 Advanced Accounting 3.13 Single Entry System - I

The following was the state of affairs on 31st December; cash in hand Rs 8000; Cash at Bank Rs
11,680; Debtors Rs 1,12,580; Bills Receivable Rs 13,680 stock Rs 73,460; Creditors Rs 42,940; Bills
payable Rs 11,900. The partners had drawn Rs 9,000 each and were further entitled to interest on their
capital at 5% per annum. It was agreed to depreciate plant at the rate of 10% and furniture at 5%. Draw
up the final accounts.
8. Chinna, Madhu, Vasu are in partnership and keep their books by single entry. The state of Affairs
of the firm as on 30th september 2006 was as under.
Liabilities Rs Assets Rs
Bills payable 2,100 Cash in hand 3,750
Expenses outstanding 1,950 Cash at bank 10,350
Creditors 23,100 Bills Receivable 9,000
Capital Accounts Debtors 30,600
Chinna 15000 Stock 25,200
Bharat 15000 Madhu’s Current A/c. 2,790
Vasu 15000 45,000
Chinna Current A/c 6,450
Vasu Current A/c 3,090
81,690 81,690
The position of the firm on 30th September 2007 was :

Cash in hand Rs 4,200 : Cash at Bank Rs 10,710; Debtors Rs 36,900; stock Rs 28,080; Bills
payable Rs 1500; creditors Rs 18,600 and 4% investment of the face value of Rs 6,000 purchased at
97%
Each partner had drawn Rs 750 per month at the beginning of every month during the year. 8%
interest on capital and drawings drawn during the year is to be charged. On 1st April 2007 each partner
had introduced Rs 4,500 as further capital in the firm.
Ascertain the profit or loss made by the firm during the year ending september 30,2007 and show
the Balance sheet as on that date.

3.13 SUGGESTED READINGS :

Financial Accountancy : Shukla Grewal
Financial Accountancy : Jain and Narang
Financial Accountancy : R.L. Gupta & V.K. Gupta

Dr. Ch. Suravinda.

 LESSON - 4

SINGLE ENTRY SYSTEM - II

OBJECTIVES : In the previous lesson you learned that the profit under single entry system can be
ascertained under two methods i.e. statement of Affairs Method and conversion method. As we have
already seen how the statement of Affairs is prepared, In the present lesson you can learn the
conversation method how the account under single entry can be converted into double entry system.

STRUCTURE OF THE LESSON :

4.1 Introduction.
4.2 Conversion of Books of last year from single entry into Double entry
4.3 Some important points for conversion
4.4 Illustrations
4.5 Summary
4.6 Questions
4.7 Exercises
4.8 Suggested Books

4.1 INTRODUCTION :
The word conversion denote the change of accounts prepared under single entry system into
Double entry system. If any business concern desire to change the system of accounting from single
entry to double entry on a given date the following procedure should be adopted :

A statement of Affairs should be prepared on the date on which the change is to be made. For
bringing into books the various assets and liabilities appearing in the statement of Affairs an opening
journal entry should be made as follows :

Various Assets Account Dr

To various liabilities Account
To Capital Account
(Being balance brought forward from the statement
of Affairs)

The books will thus be opened under the double entry. In future all transactions should be
recorded according to the double entry system. i.e: first through proper subsidiary books and then posted
to the ledger.
4.2 CONVERSION OF BOOKS OF LAST YEAR :
If a businessman wants to convert the books of the 2000 maintained on single entry system into
double entry system in 2001, he should follow the following procedure, which is based on the
assumption that proper subsidiary books have been maintained under the single entry system.
 Centre For Distance Education 4.2 Acharya Nagarjuna University

1. A statement of Affairs at the beginning of the year 2000 should be prepared and posted from it
all those accounts which have not been maintained already.
2. The cash book should be gone through and entries relating to impersonal accounts should be
posted to their respective accounts as these items were not posted to impersonal accounts under
the single entry system. This would complete the double entry of the cash book
3. The Debtors and creditors accounts which have already been kept under the single entry system
Should be scrutinised in order to find out the items which have been made direct there in without
passing through the accounts e,g, debts, discounts , allowances etc should be posted to their
respective impersonal accounts so that the two-fold effect of such transactions may be completed.
4. If a petty cash book is maintained, the monthly analysis should be posted to the debit of the
various accounts for expenses and the total credited to petty cash account.
5. After completing the double entry of all the transactions of the previous year, a trial balance
should then be prepared to test the arithmetical accuracy of the books. After taking into
consideration the necessary adjustments like outstanding expenses and incomes, depreciation,
provision for bad debts and discounts, Trading and profit and loss account and Balance sheet
should be prepared in the usual manner.

4.3 IMPORTANT POINTS FOR CONVERSION :

For the convenience of the students for converting the single entry into double entry some
important points are given below.
1 Ascertainment of credit sales and credit purchases.
Usually a question on single entry does not give the figures of credit sales and credit purchases
so to find them out a Total Debtors Account and a Total creditors account is prepared.
Illustration I
From the following information you are required to calculate total purchases :
Rs.
Cash purchases 2,55,000
Creditors as on April 1, 2006 1,20,000
Cash paid to creditors 4,65,000
Purchases returns 15,000
Creditors as on March 31st 2007 2,01,000
Solution :
Dr Total Creditors Account Cr
Amount Amount

Rs Rs
To cash 4,65,000 By Balance b/d 1,20,000
To returns 15,000 By Purchases made

To Balance c/d 2,01,000 during the year (Balancing 56,100

figure)

6,81,000 68,1000
 Advanced Accounting 4.3 Single Entry System- II

Total Purchases = Cash purchases 2,55,000

Credit purchases 5,61,000
8,16,000
Illustration 2
From the following information calculate Total sales :
Rs.
Opening debtors 20,000
Cash received from debtors 40,000
Cash sales 40,000
Closing debtors 32,000
Returns inward 2,000
Bad debts 8,000
Solution :
Dr Total Debtors Account Cr

Credit Sales = 62,000

1,02,000
2. Ascertainment of opening and closing Debtors and creditors when credit sales and purchases are
given :
In such a case the opening or closing balance of debtors and creditors can easily be ascertained
by preparing the total Debtors and total creditors account as already explained. The balancing figure in
the Total Debtors Account and the Total creditors Account will be opening or closing balance of debtors
and creditors.

Illustration 3 :
Calculate debtors balance at the end :
Rs
Opening debtors 1,00,000
Total sales 4,00,000
Bad debts 10,000
Returns inwards 2,500
cash sales 50,000
cash received from customers 1,50,000
Bills Received from customers 45,000
 Centre For Distance Education 4.4 Acharya Nagarjuna University

Solution :
Dr Total Debtors Account Cr
Amount Amount

Rs Rs
To Balance b/d 1,00,000 By Bad debts 10,000
To Sales By Returns 2,500

(4,00,000 – 50,000) 3,50,000 By Cash 1,50,000

By B/R 4,500

By Balance c/d 2,42,500

4,50,000 4,50,000

Illustration 4
Calculate creditors balance at the end.
Rs.
Sundry creditors on the Opening day 7,600
Cash paid to creditors 1,750
Discount Received 250 Credit Purchases 9,300
Acceptances given to creditors 5,870
Solution :
Dr Sundry Creditors Account Cr
Amount Amount

Rs Rs
To Cash 1750 By Balance b/d 7,600

To Discount250 By Credit purchases 9,300

To Bills payable 5870

To Balance c/d
(Balancing figure)
9030
16,900 16,900

3. Ascertainment of Bills Receivable and Bills payable :

Sometimes the question may not give the opening or closing balances of Bills Receivable and
Bills payable. Such figures can be found out by preparing the Bills Receivable Account and Bills
payable Account as shown below:

Illustration 5 :
Calculate opening Balance of Bills receivable from the following information.
 Advanced Accounting 4.5 Single Entry System- II

Rs.
Bills Receivable accepted during the year 41,800
Bills Receivable an cashed during the year 41,800
Bills Receivable Dishonoured 3,600
Bills Receivable at the end of the year 12,000
Solution :
Dr Bills Receivable Account Cr
Amount Amount

Rs Rs

To Balance b/d 15,600 By cash 41,800

(Balancing fig) By Bills dishonoured 3,600

To Bills received 41,800 By Balance c/d 12,000

57,400 57,400

Illustration 6
From the following data calculate the opening Balance of Bills payable.
Rs.
Cash paid during the year on Bills 44,500
Closing Balance of Bills payable 35,000
Bills accepted during the year 54,500

4. Ascertainment of opening and closing stock when Rate of gross profit is given.
These figures will be calculated as follows :
Opening stock = Cost of goods sold + Cl. stock - Purchases.
Closing stock = Opening stock + Purchases - Cost of goods sold
Illustration 6
Calculate the stock at the end
Rs.
Stock in the beginning 20,000
Cash Sales 60,000
Credit sales 40,000
 Centre For Distance Education 4.6 Acharya Nagarjuna University

Purchases 70,000
Rate of gross Profit on cost 1/3 Solution :
Total sales Rs
Cash sales = 60,000
Credit sales = 40,000
=1,00,000

Cost of goods sold is = 100000 5 3/4 = 75,000

Closing stock = op. stock + purchases – cost of goods sold.
= 20,000 + 70,000 – 75,000
= Rs 15,000
Note : If gross profit Ratio on Cost of goods is given in the problem, first we have to convert it
on sales.
On cost of goods = on sales
25% = 20%
33/3% = 25%
50% = 33 1/3%
662/3% = 50%
1/2 = 1/3
1/3 = 1/4
1/3 = 1/5
1/4 = 1/5
1/5 = 1/6
1/6 = 1/7 and so
on
In the above problem grass Profit is 1/3 on cost of goods sold. It is equal to 1/4 of sales i.e.
100000 5 1/4 = Rs 25,000.
5. Ascertainment of opening Balance of capital, an Asset or a liability.
Such a missing figure can be ascertained by preparing the opening statement of Affairs. The
missing item would be the balancing figure in the statement of Affairs.
This can be seen in the following example.
Illustration 7 calculate the capital in the
beginning.
Rs.
Profit made during the year 48,000 capital at the end1,60,000
Capital introduced during the year 40,000
Drawings 24,000
Solution :
Dr Capital Account Cr
Amount Amount

Rs Rs
By Balance b/d 96,000
(Balance figures)
 Advanced Accounting 4.7 Single Entry System- II

To Drawings 24,000 By Cash 40,000

To Balance c/d 160,000 By Profit 48,000
184,000 184,000

It can be calculated by the following equation :

Profits = Capital at the end + Drawings – Capital Introduced – Capital in the beginning.
Capital in the beginning = Rs 16,0000 + Rs 24,000 – Rs 40,000 – Rs 48,000 = 96,000

6. Ascertainment of cash and Bank Balances :

Sometimes opening and closing balance of cash in hand or cash at Bank are not given, such
figures can be ascertained by preparing the columnar cash Book. When all the known items are written
up in the cash Book, the balancing figure would be the missing item.
Illustration 8 :
From the following information find the cash balance on the opening day.
Rs.
Cash received from the Debtors 25,000
Cash sales 15,000
Interest paid 1,100
Drawings 3,000
Salaries 9,500
Expenses paid 8,900
Amount paid to creditors 16,000
Cl. Balance of cash 4,500
Solution :

From the following particulars extracted from the books of a trader kept under the single Entry
system, you are required to find out the figures for credit sales and credit purchases by showing the
total Debtors Account and total creditors Account. Show also the Bills Receivable Account and Bills
payable Account, Balance 1-1-2007 :
 Centre For Distance Education 4.8 Acharya Nagarjuna University

Amount Amount
Rs Rs
Total Debtors 1,14,400 Discount allowed 8,400
to customers
Bills Receivable 8,000 Returns from customers 3,250
Total creditors 52,800 Return to suppliers 2,660
Bills Payable 5,000 Bad debts written off` 7,080
H is transaction for the year
Cash paid to creditors 1,40,500
Discount allowed by
suppliers 5,300 Cash received
Cash received from against bills
customers 270800 receivable 28,400
Payment made again s Bills payable 14,000 Closing Balances 31-12-07
Bills receivable Dishonoured 22,00 Total debtors 1,11,200
Bad debts previously written off 2000 Total creditors 56,800
now recovered Bills receivable 2,000
cash sales during the year 31,600 Bills payable 6,000
Cash purchases during the year 38,500
Solution :

Dr Total Debtors Account Cr

Date Particulars Amount Date Particulars Amount
Rs. Rs.

2007 2007

Jan 1 To Bal b/d 1,14,400 2007 By cash 2,70,800

Jan1 to By Discount 8,400
Jan 1 To Bills Receivable A/c 2,200 Dec31 By Returns in words 3,250
to To Credit sales 3,08,730 By Bad debts 7080

Dec31 (Balancing figure) By Bills Receivable A/c 24,600

By Balance c/d 1,11,200

4,25,330 4,25,330

2008
Jan 1 To Bal b/d 1,11,200
 Advanced Accounting 4.9 Single Entry System- II

Dr Total Creditors Account Cr

Date Particulars Amount Date Particulars Amount

Rs. Rs.

2007 To Balance b/d 8,000 2007

Jan 1 To Total Debtors 24,600 Jan 1 By cash 28,400

(B/R)
to Dec31 (Balancing figure) By Total Debtors A/c 2200
Dec31 (Bills dishonoured) 2,000

Date Particulars Amount Date Particulars Amount

Rs. Rs.

2007 To cash 1,40,500 2007

Jan 1 To Discount 5,300 Jan 1 By Balance b/d 52,800

to To Returns out words 2,660 Jan 1 By credit purchases 1,67,460
Dec31 To Bills payable 15,000 to (Balancing big)

Dec31 To Balance c/d 56800 Dec31

2,20,260 2,20,260
2008
Jan

By Balance b/d 56,800

Dr Bills Receivable
Account Cr
Dec31Balance c/d

2008
Jan 1To Balance b/d

Dr Bills Payable Account Cr

Date Particulars Amount Date Particulars Amount
Rs. Rs.

2007 2007

Jan 1 To Cash (B/R) 14000 Jan 1 By Balance b/d 5,000

to
Dec31 To Balance c/d 6000 Jan 1 By Total creditors
to (Bills accepted) 15,000

Dec31 (Balancing fig)

20,000 2008 20,000

 Centre For Distance Education 4.10 Acharya Nagarjuna University

Jan 1 By Balance b/d

6,000
Illustration 10 :
Anil carries on a small business, but he does not maintain a complete set of account books. He
banks all receipts and makes all payments only by means of cheques. He maintains properly a cash
book, a sales ledger and a purchase ledger. He also makes a proper record of the assets and labilities as
at the close of every accounting year. From such records you are able to gather the following facts :
Receipts Amount Payments Amount
Rs Rs

From sundry Debtors 52,875 New plant purchased 1,875

Cash sales 12,375 Drawings 4,500
Paid in by the proprietor 7,500 Salaries 3,375
Interest paid 225

Telephone 375

Rent 3,600

Light and power 1,425

Sundry expenses 6,375

Sundry creditors
(Purchase ledger Accounts) 22,875
72,750 72,750

Assets and liabilities :

As at 31-12-2006 As at 31-12-2007
Rs Rs
Sundry Creditors 7,575 7,200
Sundry Debtors 11,250 18,375
Bank 1,875 ------
Stock 18,750 9,375
Plant 22,500 21,975
From the above data, prepare the profit and loss Account for the year ended 31st December, 2007
and the Balance sheet as on that date.
Solution :
Trading and profit and loss Account of Mr. Anil for the year ended 31-December 2007.
Particulars Amount Particulars Amount
Rs Rs
To opening stock 18,750 By sales
To Purchases 22,500 Cash 12,375
To wages 20,175 Credit 60,000 72,375
To Light and power 1,425
To gross profit c/d 18,900 By closing stock 9,375
 Advanced Accounting 4.11 Single Entry System- II

81,750 81,750
To salaries 3,375 To Interest
225
To Telephone 375 By gross profit b/d 18,900
To Rent 3,600
To sundry expenses 6,375 To
Depreciation 2,430
To Net - profit 2,520
18,900 18,900

Balance sheet of Mr. Anil

as on 31st December 2007,
Liabilities Amount Amount Assets Amount Amount

Rs Rs Rs Rs
Sundry creditors 7200 Cash at Bank 98,25

Capital Account Sundry Debtors 18,375

as on 1-1-07 46,800 Stock 9,375

Add Additional
capital
7,500 Plant on 1-1-07 22,500
Net profit 2,520 Add Purchase 1,875

56,820 24,375

Less Drawings. 4,500 52,320 less Depreciation 2,430 21945

59,520 59520

Working Notes :
1. Calculation of credit purchases :
Creditors Account.
Rs Rs

To cash account 22,875 By Balance b/d 7,575

Balance c/d 7,200 By credit purchases 22,500
(Balancing fig)

30,075 30,075
2. Calculation of credit Sales :
Sundry Debtors Account
Rs Rs

To balance b/d 11,250 By Cash 52,875

 Centre For Distance Education 4.12 Acharya Nagarjuna University

To credit sales 60,000 By Balance b/d 18,375

(Balancing fig)
71,250 71,250

3. Calculation of Depreciation of Plant : Rs.

Book value of plant on 1-1-07 22,500
Add Plant purchased 1,875

less Book value of plant on 31-12-07 21,945

Depreciation for the year 2,430

4. Calculation of Balance at Bank : Rs.

Balance as on 1-1-07 1,875
Add Receipts for the year 72,750
74,625
less Payment made during the year 64,800
Balance as on 31-12-07 9,825

Computation of capital as on 1-1-07

Statement of Affairs
Liabilities Rs Assets Rs
Sundry creditors 7,575 Cash at Bank 1,875
Capital (Balancing figure) 46,800 Sundry Debtors 11,250
Stock 18,750

Plant 22,500

54,375 54,375

Illustration : 11
Mr. Ajay Kumar keeping his books under single Entry system has placed the following facts
before you :
1. His statement of Affairs as on 1st Jan 2007. 2. A
summary of cash transactions for the year 2007.
3. A list of remaining transactions for the year.1.
Rs Rs

Bank over draft 1,00,000 Debtors 300000

creditors 2,00,000 less Provision 15000 28,500

Bills payable 12,000 Bills Receivable 72,000

 Advanced Accounting 4.13 Single Entry System- II

Outstanding exp 8,000 Stock 2,80,000

Capital Account 6,08,000 Plant 2,00,000
Building 80,000

Cash in hand 11,000

9,28,000 9,28,000

2.
Rs Rs

To Balance on 1-1-07 11,000 By payment to crs 7,20,000

To Bills Receivable 2,00,000 By cash purchases 1,60,000
To Debtors 8,72,000 By Bills payable 3,20,000
To cash sales 1,64,000 By salaries 60,000
To Mrs. Ajay kumar 1,00,000 By Rent 32,000
By general exp 18,000

By Drawings 21,600

By Balance c/d 11,400

13,47,000 13,47,000

3.
Rs Rs
Total sales 16,10,000 Stock on 31-12-07 3,40,000
Total purchases 14,40,000 Outstanding general expenses 12,000
Discount allowed 4,000

Discount Received 8,000 Bad debts 8,000

Bills Receivable 1,20,000 Prepaid rent 7,200
31-12-07
Bills payable accepted during 3,72,000
the year.
Provide 5%. For doubtful debts and 2 1/2 % for discount on debtors. Depreciate building by 2%
and plant by 10%.
You are required to prepare trading and profit and loss account and Balance sheet of M.r Ajay
Kumar form the above particulars.
Solution :
Trading & Profit and Loss Account of Mr. Ajay Kumar For
the year ending 31 Dec 2007.
Rs Rs Rs Rs
To opening stock 2,80,000 By sales 9,825
 Centre For Distance Education 4.14 Acharya Nagarjuna University

To purchases Cash 1,64,000

Cash 1,60,000 Credit 14,46,000 16,10,000

Credit 12,80,000 14,40,000 By closing stock 3,40,000

To G Profit c/d 2,30,000

To salaries 19,50,000 19,50,000

60,000

To rent 36,000 By gross profit b/d 2,30,000

less prepaid To 7,200 28,800

gen. expenses
18,000 By Discount
less out standing last 8,000 Received 8,000
year
10,000
Add out standing 12,000 22,000
this year 4,000
To Discount allowed

To Bad Debts 8,000

Add provision for 30,700

Doubtful debts 38,700
less Existing 15,000 23,700
provision To
provision for
Discount on Drs 14,584

To Depreciation :
Buildings 1,600
Plant 20,000 21,600

To Net profit 63,316

2,38,000 2,38,000

Balance sheet of Mr. Ajay Kumar as

on 31st December 2007.
Liabilities Rs Rs Assets Rs Rs

Out standing 12,000 Cash in hand 11,400

 Advanced Accounting 4.15 Single Entry System- II

Bank O.D 1,00,000 less provision 30,700

Mrs. Ajay’s loan 1,00,000 for Bad debts

6,44,700

6,08,000 less Provision

21,600 for Discount 14,584

5,86,400 Stock 3,40,000
63,316 6,49,716 Prepaid Rent
Plant
2,00,000
less Depreciation 20,000
Buildings 80,000

less Depreciation 1,600

13,0,5716
expenses
Bills payable
64,000 Bills Receivable 1,20,000
Creditors 3,80,000 Debtors 6,14,000

Capital A/c on 1-1-2007

less Drawings5,68,716 Add Net profit7,200

1,80,000 78,400

13,05,716 Workings Notes :

1. Calculation of Debtors as on 31-12-07
Total Debtors Account

Rs Rs
To Balance b/d 3,00,000 By Cash 8,72,000
To credit sales 14,46,000 By Bills Receivable A/c
2,48,000
 Centre For Distance Education 4.16 Acharya Nagarjuna University

By Discount allowed 4,000

By Bad debts 8,000

By Balance c/d 6,14,000

17,46,000 17,46,000

Bills Receivable Account

Rs Rs
To Balance b/d 72,000 By Cash 2,00,000

To Debtors Account 2,48,000 By Balance c/d 1,20,000

(Balancing figure)

3,20,000 3,20,000
Total creditors Account
Rs Rs
To cash 7,20,000 By Balance b/d 2,00,000
To Discount8,000 By Total 1,20,000
credit
To Bills payable Account 3,72,000 Purchases

To Balance c/d 3,80,000

14,80,000 14,80,000
Bills payable Account
Rs Rs
To cash 3,20,000 By Balance b/d 12,000
To Balance c/d 64,000 By Total creditors A/c 3,72,000
(Balancing figure)
3,84,000 3,84,000

Illustration 12
Sri Gopi krishna a small producer of machine parts has supplied the following details of his
business transactions.
Rs.
Cash and Discount credited to Debtors 3,21,000
Discount Received 1,000
Expenses paid in cash 17,000
Bad debts 2,500
Cash withdrawal from Bank 22,500
 Advanced Accounting 4.17 Single Entry System- II

Expensed paid by cheque 17,500

Cash collections from Debtors 1,01,500
Cash deposit in Bank 77,500
Cash drawings 7,500
Cheques collected from Debtors 2,16,000
Drawings by cheques 21,000
Cash in hand on 30-9-2007 11,000
Discount allowed 3,500
Cheques paid to creditors 2,67,000
Total sales 3,45,500
Cash purchases 10,500
Cash paid to creditors 31,500
As on 1-10-2006 As at 1-10-2007
Rs Rs
Debtors ? 75,000
Cash and Bank Balance 69,500 26,500
Stock 43,500 52,500
Plant 28,000 23,000
Furniture 11.000 11.000
Creditors 30,000 47,000
Labilities for expenses 2,500 4,000
You are required to prepare Trading and profit and loss Account for the year ending 30-9-07 and
Balance sheet as at that date for Sri Gopi Krishna..
Solution :
Trading and profit and loss Account of Gopi Krishna for the year ending 30-9-07

Cr
 Centre For Distance Education 4.18 Acharya Nagarjuna University

Balance sheet of Shri Gopi Krishna as on 30th september, 2007.

Liabilities Rs Assets Rs

Creditors 47,000 Cash in hand 11,000

Outstanding Expenses 4,000 Cash at Bank 15,500
Capital Stock 52,500

As on 1-10-06 Debtors 75,000

184000 Furniture 11,000

less:Drawings28,500 Plant 28,000

Net loss 18,500 less Depreciation 5,000 23,000

47,000 1,37,000

Working Notes :
1,88,000 188,000

Dr Cr
Particulars Cash Bank Particulars Cash Bank
Rs. Rs Rs.

To Balance b/d 50,000 By Expenses 17,000 17,000

(Balance fig for bank) By Cash 22,500

(69500 - 50,000) 19,500 By Bank 77,500

To Bank, cash 22,500 77,500 By Drawings 7,500 21,000

Debtors 1,01,500 2,16,000 By Creditors 31,500 2,67,000
Cash sales 11,500 By Purchases 10,500

(Bala fig) By Balance c/d 11,000 155,00

15,50,000 3,43,500 1,55,000 3,43,500

Dr Sundry Debtors Account Cr

Rs Rs
To Balance b/d 64,500 By Cash 1,01,500
(Balancing figure) By Bank 2,16,000

To credit sales By Discout 3,500

 Advanced Accounting 4.19 Single Entry System- II

Total sales 3,45,500 By Bad debts 2,500

less cash sales 11,500 3,34,000 By Balance c/d 75,000

3,98,500 3,98,500

Dr Balance sheet as at 1-10-2006 Cr

Rs Rs

Creditors 30,000 Cash 19,500

Out standing Expenses 25,000 Bank 50,000
Capital (Balancing figure) 1,84,000 Debtors 64,500
Stock 43,500
Furniture 11,000
Plant 28,000
2,16,500 1,16,500

Dr Creditors Account Cr
Rs Rs
To Bank 2,67,000 By Balance b/d 30,000
To Cash 31,500 By credit purchases

To Discout 1,000 (Bal - fig) 3,16,500

To Balance c/d 47,000

3,46,500 3,46,500

4.5 SUMMARY :

Under single Entry system profits can be ascertained by either statement of affairs method or by
conversion method. Conversion method involves a number of steps necessary to convert single entry
or incomplete records into double entry records. For this purchase, cash/Bank account, Total debtors
account, Total creditors accounts, Bills receivable and Bills payable accounts are prepared to find out
the missing figure of credit purchases or credit sales. Opening capital is found out by preparing the
opening statement of affairs. After finding out the missing figures final account can easily be prepared.

4.6 SELF ASSESSMENT QUESTIONS :

1. State the necessary steps that are required to be taken to convert single entry into double
entry.
2. State briefly how you would convert a set of books, which had been kept on the single
Entry into the Double Entry.
 Centre For Distance Education 4.20 Acharya Nagarjuna University

4.7 EXCERCISES :

1. Mr. Krishna commenced business as a cloth merchant on 1st January , 2007 with a capital of Rs
20,000. On the same date he purchased furniture for cash Rs 6,000. The books are maintained
by single Entry method. From the following particulars calculate cash in hand on 31st December,
2007. Prepare trading and profit and loss account for the year ending 31st December, 2007 and
the Balance sheet as on that date.
Rs
sales (including cash sales Rs 14,000) 34,000
Purchases (including cash purchases Rs 8,000)
30,000
Drawings 2,400
Salaries 4,000
Bad debts written off 1,000
Business Expenses 1,400
Stock of goods on 31-12-2007 13,000
Sundry Debtors on 31-12-2007 10,400
Sundry creditors on 31-12-2007 7,200
Provide depreciation on furniture at 10% p.a.
2. Mani a trader does not keep proper books of account he is able to give you the following
information regarding his assets and liabilities.
As on Dec 31 As on Dec 31
2006 2006
Creditors for goods 21,000 19,000
Creditors for expenses 1,500 1,800

Bills payable 8,700 11,500

Sundry debtors 35,000 34,000

Stock (at cost) 28,000 25,000
Furniture 10,000 12,000
Cash 5,100 ?
The following additional information is also available in respect of his business for 2007.
Rs
Bills payable issued 20,800
Payments to creditors 31,000
Cash sales 15,000
Expenses paid 6,600
Drawings 8,000
Bad debts during the year amounted to Rs 900 As regards sales, he informs you it is his practice
to sell goods at cost + 25% . Prepare the annual accounts for 2007 provide for depreciation on furniture
at 10%.
3. From the following details, prepare Trading profit and loss Account and Balance sheet.
 Advanced Accounting 4.21 Single Entry System- II

As on 1-1-2007 As on 1-1-2007
Stock 25,000 12,500

Debtors 62,500 87,500

Cash 6,250 10,000

Furniture 2,500 2,500

Creditors 37,500 43,750

Bad debts Rs 1250, Discount received Rs 3,750 Discount allowed Rs 2,500. Sundry expenses Rs
7,500 payable to creditors Rs 1,12,500 Received from debtors Rs 1,33,750. Drawings Rs 10,000, sales
returns Rs 3,750 Purchase returns Rs 1,250 charge depreciation on furniture at 5%.
4. Sri Ram commenced business on 1st Jan 2007 with a capital of Rs 25,000 out of this he purchased
furniture Rs 4,000. During the year he borrowed from his wife Rs 5,000. and introduced a further
capital of Rs 3,000.
From the following particulars extracted from his books prepare the Trading and profit and loss
account and Balance sheet as on 31-12-2007.
Rs.
Receipts from debtors 46,700
Cash sales 30,000
Cash purchases 10,000
waged paid 1,000
Salaries to staff 6,200
Trade Expenses 3,400
Cash Drawings 7,700
Paid to creditors 50,000
Discounts Allowed to debtors 800
Bad debts 1,500
Sri Ram used goods worth Rs 1,300 for private purpases which was not recorded in the book.
On 31-12-2007 his debtors were worth Rs 21,000 and creditors Rs 15,000 stock in trade is Rs 10,000
Furniture is to be depreciated at 20% per annum.
5. The following information is supplied from which you are required to prepare the p & L Account
for the year ended 31st Dec 2007.
1-1-2007 31-1-2007
Rs Rs
Sundry Assets 18,000 20,000
Stock 1,400 19,000
Cash in hand 8,200 4,800
cash at a Bank 2,200 8,000
Debtors ? 26,000
Creditors 12,000 9,800
 Centre For Distance Education 4.22 Acharya Nagarjuna University

Outstanding expenses 1,000 600

Details of transactions for 2007 Rs.

Receipts from and discount credited to Debtors

2,45,000
Returns from debtors 6,000
Bad debts 1,000
Sales cash and credit 3,00,000
Returns to creditors 3,000
Payments to creditors by cheque 2,36,200
Receipts from debtors deposited into Bank 2,43,000
Cash purchases 10,000
Salary paid out of bank 18,000
Expenses paid by cash 5,000
Drawings cash 9,400
Purchase of sundry assets by cheque 2,000
Cash with drawn from bank 21,000
Cash sales deposited in Bank ?
Discount allowed by creditors 4,000
Debtors at the beginning Rs 50,000 and at the end Rs 60,000 cash received from debtors Rs 40,000.
Allowances Rs 4,000, Bad debts Rs 6,000 Discount allowed Rs 2,000. Draw the relevant ledger account
and calculate credit sales.

7. Suneel maintained his books under single entry system. He maintained a cash book and a debtors
ledger and creditors ledger. He desires you to prepare final accounts for the year ended 31st
December 2007. The analysis of his cash book showed the following.
Receipts Rs Payments Rs

Received from debtors 17,625 New plant 625

Cash sales 4,125 Drawings 1,500
Additional capital 2,500 wages 7,200
Salaries 1,125

Interest 75

Telephone 125

Rent 1,200

Printing 2,125

Creditors 7,625

24,250 21,600
 Advanced Accounting 4.23 Single Entry System- II

Additional Information :
1-1-2007 31-12-2007

Creditors 2525 2400

Debtors 3750 6125

Bank 625 ?

Stock 6250 3125

Plant 7500 7315

8. Balaji maintains his records under single - entry method. His financial position as on 1-1-2007
was as follows.

Capital Rs 70,000; Creditors Rs 17,000; Freehold property Rs 50,000; Stock Rs 25,000; Debtors
Rs 20,000; Furniture Rs 20,000.
Cash Account
Receipts Rs Payments
Rs
To debtors 15,000 By Bank O.D. 10000
To Cash sales 80,000 By Drawings 3,000
By Expenses 50,000

By Payments to
Creditors 20,000
By Balance c/d 12,000

95,000 95,000

Additional information :
Balance on 31-12-2007, stock Rs 30,000; Debtors Rs 25,000; Creditors Rs 20,000; Depreciate
Free hold property and furniture at 10% and 15% respectively. Create 2 1/2% Reserve for doubtful
debts on debtors.
Show the trading account, profit and loss Account and Balance sheet as on that date.
4.8 SUGGESTED READINGS :

Financial Accountancy : Shukla Grewal

Financial Accountancy : Jain and Narang
Financial Accountancy : R.L. Gupta & V.K. Gupta

Dr. Ch. Suravinda

 LESSON – 5

HIRE PURCHASE SYSTEM - I

OBJECTIVES : By going through this lesson the student is able to understood what is
Hire purchase system ? What are its features and How these transactions are recorded in the books of
Accounts

STRUCTURE OF THE LESSON :

5.1 Introduction.
5.2 Features
5.3 Instalment system
5.4 Distinction between Hire Purchase and Instalment system
5.5 systems of Accounting records
5.5.1 goods of considerable value
5.6 Journal entries in the books of buyer
5.7 Journal entries in the books of Hire vendor
5.8 Illustrations
5.9 Summary
5.10 Self Assessment Questions
5.11 Exercises
5.12 Suggested Readings

5.1 INTRODUCTION :
Most of the trade now - a - days carried on the basis of not only on credit but also under
instalment payment that means the buyer need not pay the cost of goods. Immediately, certain
percentage is paid on the date of agreement and the remaining in instalment. This system of purchase is
known as Hire purchase system or Instalment Purchase system.
5.2 FEATURES :
Under hire purchase system, the buyer acquires the possession of the goods immediately and
agrees to pay the total hire purchase price in instalments. Each instalment being treated as hire charges
till the payment of last instalment. After payment of last instalment the ownership of goods is passes
from the seller to the buyer If the buyer makes default in payment of any instalment the seller has a right
to take back the goods from the buyer, and the amount already received is treated as a hire charge. But
if the buyer is paying all the instalments on the due dates the sellers has no right to repossess these goods
from the buyer. The purchaser can also return the goods at anytime without having to pay further
instalments that means he has an option to buy the goods. Thus this system is advantageous both to the
buyer and the seller. The buyer gets the facility of paying the total amount in instalments under this
system and the seller is able to sell more goods under this system. Under the Hire purchase Act, the
purchaser has certain rights the chief of which is that. if a certain proportion of the total amount due is
paid, the goods cannot be repossessed without sanction of the court. There is also a ceiling on the interest
that can be charged.
 Centre For Distance Education 5.2 Acharya Nagarjuna University

5.3 INSTALMENT SYSTEM :

In case of instalment system, both the possession and ownership of goods are transferred to the
buyer immediately on signing the contract, In case the buyer defaults, the seller cannot take back the
goods sold, he can only sue for non payment of the instalments.

5.4 DISTINCTION BETWEEN HIRE PURCHASE SYSTEM AND INSTALMENT

PURCHASE SYSTEM :
The following are the main Points of distinction between the two systems.

Hire Purchase Instalment Purchase

1. It is an agreement of Hiring. 1. It is an agreement of Sale.

2. The ownership remains with the 2. The ownership passes from seller
Seller until the payment of last to the buyer immediately on
Instalment. entering the agreement.
3. Goods can be returned if the buyer 3. The goods cannot be returned by
Does not want to pay rest of the the buyer to the seller unless there
Instalment. Is some default on the part of the
Seller.
4. Under the system the buyer cannot 4. The buyer can do all these things.
Sell destroy transfer damage or
Pledge the goods.
5. Under this system the seller can 5. Under instalment purchase the
Repossess the goods if the buyer seller can sure in the court of law
Was in default of payment of any if the buyer was in default in
Instalment. Payment of any instalment.

In case of both Hire purchase and instalment system, the buyer has to pay more than the cash
price. This is because of the fact that hire purchase price includes interest. It is called as hire charges or
finance charges, The buyer cannot debit the whole amount paid to the cost of asset acquired. Only the
cash price should be debited to asset account and interest is to be charged to profit and loss account
treating it as a revenue expense.

5.5 SYSTEMS OF ACCOUNTING RECORDS :

The systems of maintaining records for hire purchase transactions is different in each of the
following circumstances.
1. When goods of substantial sales value are the subject matter of sale. e.g. trucks, heavy machinery.
2. When goods of small sales value are the subject matter of sale.
As we have already seen that there are two parties in the hire purchase agreement. i.e. buyer and
seller.
5.5.1 Goods of considerable value :
In case the hire purchase transactions relating to goods of substantial sales value, in the Books of
buyer’s there are three methods of recording hire purchase transactions in the books of the buyer.
 Advanced Accounting 5.3 Hire Purchase system - I

1. Treating the goods not becoming the property of the buyer

Under this method goods purchased under hire purchase system will not become the property of
the buyer until at the instalment are paid.

5.6 JOURNAL ENTRIES IN THE BOOKS OF BUYER :

1. When an asset is purchased on hire Purchase No Entry
2. For down Payment on the date of agreement
Asset Account Dr.
To cash account.
3. When first instalment due
Asset Account Dr
Interest Account Dr
To Hire vender Account.
4. When Instalment Paid.
Hire vender A/c Dr
To cash Account.
5. When depreciation charged.
Depreciation Account Dr
To Asset A/c.
6. When depreciation and Interest transferred to P & L Account
Profit & Loss Account Dr To
interest Account Dr
To Depreciation Account

Note : Entries 3 to 6 will be repeated in the subsequent years until last instalment paid.
2. Treating the goods as outright property
When the goods purchased on hire purchase system is treated as property of the business, the
following entries appears in the books of the buyer.
1. When an asset is purchased on hire purchase system.
Asset Account Dr
To Hire Vendor Account
2. For down payment on the date of agreement
Hire vendor Account Dr
To Cash / Bank Account.
3. Before 1st instalment date for Interest due
Interest Account Dr
To vendor Account
4. For the payment of 1st instalment
Hire vendor Account Dr
To Bank Account
5. For depreciation.
Depreciation Account Dr
To Asset Account
6. For transfer of interest and depreciation to profit and loss account.
 Centre For Distance Education 5.4 Acharya Nagarjuna University

Profit and loss Account Dr

To Interest Account
To Depreciation Account.
Note : Entries 3 to 6 appears in all the years,
3. Interest suspense Method :
Under this method, the total interest payable due to purchase of asset under Hire purchase is
debited to interest suspense account, Interest included in each instalment is credited to interest suspense
account by giving debit to interest account. The following entries appears in the books of the buyer.

1. When an asset is purchased on hire purchase system.

Asset Account Dr
Interest suspense A/c Dr
To Hire vender A/c.
2. For down payment on the date of agreement. Hire vender Account Dr
To Bank A/c.
3. For interest due at the end of the year
Interest Account Dr
To Interest suspense Account.
4. For the payment of the first instalment
Hire vendor Account Dr.
To Bank Account.
5. For depreciation at the year end Depreciation Account Dr
To Asset Account
6. For transfer of interest and depreciation to profit and loss account
Profit and Loss account Dr
To Interest account
To Depreciation account.
Note : Entries from 3 to 6 will appear every year.
Generally the second method is adopted in the absence of any specific method in the examination
Questions.

5.7 JOURNAL ENTRIES IN THE BOOKS OF HIRE VENDOR :

Under the first Method :

1. When goods are sold on hire purchase Hire purchaser’s Account Dr

To sales Account.
2. For cash received on the date of agreement.
Bank Account Dr
To Hire purchaser’s Account.
3. For interest due on instalment at the end of the year.
Hire purchasers Account Dr
To Interest Account.
4. For receipt of the instalment.
Bank Account Dr
 Advanced Accounting 5.5 Hire Purchase system - I

To Hire purchasers Account.

5. For transferring the balance of interest to profit and loss account.
Interest Account Dr
To Profit and loss Account.
Note : Entries of 3 to 5 will appear in every year.
Interest suspense Method :
Under this method, the differences between the hire purchase price and the cash price is credited
to the interest suspense account. As and when the interest becomes due on each instalment, it is
credited to interest account and corresponding debit given to interest suspense account. The
following entries passed under this method.
1. When goods are sold on hire purchase
Hire purchaser’s Account Dr
To sales Account
To Interest suspense Account
2. For cash received on delivery
Bank Account Dr
To Hire purchaser’s Account
3. For interest due on instalment at the end of the year.
Interest suspense Account Dr
To Interest Account
4. For receipt of the amount of instalment
Bank Account Dr
To Hire purchaser’s Account
5. For transfer of Interest to P & L A/c
Interest Account Dr
To P & L A/c
Note : Entries from 3 to 5 appears every year. Interest in the last instalment will be difference
between the instalment payable and amount remaining unpaid by way of principal.

5.8 ILLUSTRATION – I :
‘Y’ acquires from ‘X’ machine on hire purchase system on 1-1-2004. The cash price is Rs.
60,000. Payment is to be made as follows Down payment Rs 1,00,00 and 21,000 annually for three
years. Interest is to be charged @ 12%. p.a pass the necessary journal entries and ledger accounts in
the books of both the parties under three Methods.
Solution :
calculation of Interest :
1 - 1 - 2004 Cash price Instalment Interest
included Purchase
In instalment
Down payment on 60,000 ----
 Centre For Distance Education 5.6 Acharya Nagarjuna University

1-1-2004 10,000 10,000

due on 31-12-2004 35,000
Interest included in 2nd

instalment @ 12% on 35,000 16,800 21,000 4,200

due on 1-1-2004. 50,000

Interest @ 12% on In first instalment 15,000 21,000 6,000

due on 31-12-2005
Interest included in 18,200
3rd instalment

(Difference between 18,200 21,000 2,800

21,000 - 18,200)
Due on 31-12-2005

73,000
Total

Calculation of Depreciation : Rs.

Cash price on 1-1-2004 60,000
Less Depreciation @ 20% for 2004 12,000
Balance on 1-1-05 48,000
Less Depreciation @ 20% for 2005 9,600

Balance on 1-1-06 38,400

Less Depreciation @ 20% for 2006 7,680

Balance on 1-1-07 30,720

 Advanced Accounting 5.7 Hire Purchase system - I

Solution :
First Method : In the books of y & co.
Date Particulars L.F. Debit Credit
Rs. Rs.

2004 Machinery A/c Dr 10,000

Jan1 To Bank A/c. 10,000

(Being down payment paid)

Dec 31 Machinery Account Dr 15,000

Interest A/c Dr 6,000

To x’s A/c 21,000

(Being Instalment due)

Dec 31 X’s A/c Dr 21,000

To Bank A/c 21,000

(Being Instalment paid)

Dec 31 Depreciation A/c Dr 12,000

To Machinery A/c 12,000

(Being Depreciation charged)

Dec31 Profit & loss Account Dr 18,000

To Interest A/c 6,000

To Depreciation A/c 12,000

(Being interests & Depreciation

transferred to P & L A/c)

2005 Machinery A/c Dr 16,800

Dec31 Interest A/c Dr 4,200

To X’s A/c 21,000

(Being 2nd instalment due)

Dec 31 x’s A/c Dr 21,000

To Bank A/c 21,000

(Being 2nd Instalment paid)

Dec 31 Depreciation A/c Dr 9,600

To Matchinery A/c 9,600

(Being Depreciation charged on

Dec 31 Asset) 13,800
 Centre For Distance Education 5.8 Acharya Nagarjuna University

Profit & loss Account Dr

To Interest A/c 4,200

To Depreciation A/c 9,600

(Being interests & Depreciation transfered to P&L A/c)
2006 Machinery A/c Dr 18,200
Dec31 Interest A/c Dr 2,800

To x’s A/c 21,000

(Being 3rd instalment due)
Dec31 x’s A/c Dr 21,000
To Bank A/c21,000
(Being 3rd instalment paid)
Dec31 Depreciation A/c Dr 7,680
To Machinery A/c
(Being Depreciation charged on Asset)7,680 Dec31 Profit & loss Account Dr
10,480
To Interest Account2,800
To Depreciation Account7,680
(Being Interest and Depreciation transferred to P & L Account)

LEDGER
Date Particulars Amount Date Particulars Amount
Rs. Rs.

2004 To x Account 6,000 2004 By P & L A/c 6,000

Dec31 Dec 31

2005 2005

Dec31 To x Account 4,200 Dec31 By P & L A/c 4,200

2006 2006

Dec31 To x Account 2,800 Dec31 By P & L A/c 2,800

Dr Machinery Account Cr
Date Particulars Amount Date Particulars Amount
Rs. Rs.

2004 2004
 Advanced Accounting 5.9 Hire Purchase system - I

Ja1 To Bank 10,000 By Depreciation A/c 12,000

Dec31 To Bank 15,000 Dec 31 By Bal c/d 13,000

25,000 25,000
2005
Jan1 To Bal b/d 2005 By Depreciation
13,000 9,600
Dec 31 To Bank A/c 16,000 Dec 31 By Bal c/d 20,200
29,800 29,800
2006
Jan1 To Bal b/d 2006 By Depreciation
20,200 7,680
Dec 31 To Bank A/c 18,200 Dec31 By Bal c/d 30,720
2007
Jan1
38,400 38,400

To Bal b/d
Dr Interest Account Cr

Depreciation Account Cr
Dr Journal Entries Cr
Date Particulars L.F. Debit Credit
Rs. Rs.

2004 Machinery A/c Dr 60,000

Jan1 To x’s A/c 60,000

(Being Machinery purchased on

Hire purchase)

x’s A/c Dr
Jan1 10,000
 Centre For Distance Education 5.10 Acharya Nagarjuna University

To Bank A/c 10,000

(Being down payment paid)

Dec 31 Interest A/c Dr 6,000

To x’s Account 6,000

(Being interest due)

Dec 31 To x’s Account Dr 21,000

To Bank A/c 21,0001

(Being1st instalment paid)

Depreciation A/c Dr
12,000
Dec31 To Machinery A/c 12,000

(Being Depreciation charged on

asset)

Profit & loss Account Dr

Dec31 18,000
To Interest Account 6,000

To Depreciation Account
(Being Interest & Depreciation
12,000
transferred to P & L A/c)

2005 Dr 4,200
Interest Account
Dec31 To x’s A/c (Being 4,200
interest due)

Dec 31 x’s A/c Dr 21,000

To Bank A/c21,000
(Being 2nd instalment paid)
Dec 31 Depreciation Account Dr 9,600
To Machinery Account9,600
(Being Depreciation charged on Asset)
Dec31 Profit & loss Account Dr 13,800
To Depreciation Account9,600
To Interest Account4,200
 Advanced Accounting 5.11 Hire Purchase system - I

(Being Interest & Depreciation transferred to P & L A/c)

2006 Interest Account Dr 2,800
Dec31 To x’s Account2,800
(Being interest due)
Dec31 x’s Account Dr 21,000
To Bank Account21,000
(Being 3rd instalment Paid)
Dec31 Depreciation Account Dr 7,680
To Machinery Account7,680
(Being Depreciation charged on Asset)
Dec31 Profit & loss Account Dr 10.480
To Depreciation A/c7680
To Interest Account2,800
(Being Interest & Depreciation transferred to P & L A/c

Dr Machinery Account Cr
Date Particulars Amount Date Particulars Amount

Rs. Rs.

2004
Jan1

To x’s A/c 60,000 2004 By Depreciation A/c 12,000

Dec 31 Dec 31 By Bal c/d 48,000

2005
Jan1 2005 By Depreciation

60,000
60,000

To Bal b/d 48,000 9,600

Dec31 By Bal c/d 38,400

48,000 48,000
2006
 Centre For Distance Education 5.12 Acharya Nagarjuna University

Jan1To Bal b/d2006By Depreciation

Dec31By Bal c/d
2007
Jan1To Bal b/d

Dr ‘X’ Account Cr
Date Particulars Amount Date Particulars Amount

Rs. Rs.

2004 2004

Dec31 To Bank 10,000 Jan 1 By Machinery A/c 60,000

To Bank 21,000 Dec 31 By Interest A/c 6,000

Dec 31 To Bal c/d 35,000

2005
66,000 66,000

2005
Dec 31 To Bank 21,000 Jan 1 By Bal b/d 35,000
Dec 31 To Bal c/d 18,200 Dec 31 By Interest A/c 42,000
39,200 39,200
2006 2006

Dec 31 To Bank 21,000 Jan 1 By Bal b/d 18,200

Dec 31 By Interest A/c 2,800

21,000 21,000

Dr Interest Account Cr

Date Particulars Amount Date Particulars Amount

Rs. Rs.

2004 2004

Dec31 To x’s A/c 6,000 Dec31 By P & L A/c 6,000

2005 2005

Dec 31 4,200 4,200

 Advanced Accounting 5.13 Hire Purchase system - I

2006 To x’s A/c Dec31 By P & L A/c

Dec 31
2,800 2,800
To x’s A/c 2006 By P & L A/c
Dec31

Date Particulars L.F. Debit Credit

Rs. Rs.

2004 Machinery A/c Dr 60,000

Jan1 Interest Suspense A/c Dr 13,000

To x’s A/c 73,000

(Being Machinery purchased on

Hire purchase)

x’s Account Dr

Jan1 10,000
To Bank A/c 10,000

(Being down payment paid)

Dec 31 6,000
 Centre For Distance Education 5.14 Acharya Nagarjuna University

Interest Account Dr

Interest suspense Account 6,000

(Being interest due)

To x’s Account Dr
Dec 31 21,000
To Bank A/c 21,000

(Being 1st instalment paid)

Depreciation Account Dr
Dec31 12,000
To Machinery Account 12,000

(Being Depreciation charged on

asset)

Profit & loss Account Dr

Dec31 18,000
To Depreciation Account 12,000

To Interest Account 6,000

(Being Interest & Depreciation

transferred to P & L A/c)

Interest Account Dr

2005 4,200
Dec31 To Interest suspense A/c 4,200
(Being Interest due)
 Advanced Accounting 5.15 Hire Purchase system - I

Dec31 x’s Account 21,000

To Bank Account 21,000

Depreciation Account Dr 9,600

To Machinery Account
(Being Depreciation charged on
Machinery)
Profit & loss Account Dr 13,800
To Depreciation A/c
To Interest A/c
(Being Depreciation and Interest
transferred to P & L A/c)

Interest Account Dr 2,800

To Interest suspense A/c
(Being interest due)
x’s Account Dr 21,000
To Bank A/c
(Being 3rd instalment paid)
Depreciation Account Dr 7,680
To Machinery Account (Being 10,480
Depreciation charged)
Profit & loss Account Dr
To Interest Account
To Depreciation Account
(Being Interest & Depreciation
transferred to P & L A/c)

(Being 2nd instalment paid)

2005
Dec31 9,600

Dec31 9,600

4,200

2006
Dec31 2,800

Dec 31
21,000

Dec31
 Centre For Distance Education 5.16 Acharya Nagarjuna University

7,680

Dec31
2,800
7,680

Dr Machinery Account Cr
Date Particulars Amount Date Particulars Amount

Rs. Rs.

2004 To x Account 60,000 2004 By Depreciation 6,000

Jan1 Dec31 By Bal c/d 48,000

2005
60,000 60,000
Jan1 2005 By Depreciation

To Bal b/d 48,000 9,600

Dec31 Bal c/d 38,400

2006 By Depreciation
48,000 48,000

38,400 7,680

2006 To Bal b/d

Jan 1 Dec31 By Bal c/d 30,720

2007
38,400 38,400

30,720
To Bal b/d
Advanced Accounting 5.17 Hire Purchase system - I

To x’ Account
 Centre For Distance Education 5.18 Acharya Nagarjuna University

(Being Interest in 1st instalment)

Dec 31 Bank Account21,000
To y’s Account12,000
(Being 1st instalment received)
Dec31 Interest Account Dr 6,000
To Profit & loss Account6,000
(Being interest transferred to P & L Account)
2005 y’s Account Dr4,200
Dec 31 To Interest Account 4,200
(Being interest received)
Dec31 Bank Account Dr 21,000
To y’s Account21,000
(Being 2nd instalment received)
Dec31 Interest Account Dr 4,200
To Profit & Loss Account4,200
(Being interest transferred to P & L Account)
2006 y’s Account Dr2,800
Dec 31 To Interest Account 2,800
(Being Interest due)
Dec31 Bank Account Dr 21,000
To y’s Account21,000
(Being 3rd instalment received)
Dec31 Interest Account Dr 2,800
To Profit & Loss Account28,00
(Being interest transferred to P & L A/c)

LEDGER
Dr y’s Account Cr
Date Particulars Amount Date Particulars Amount

Rs. Rs.

2004 To H. Sales A/c 60,000 2004 Jan1 By Bank A/c 10,000

Jan1 To Interest A/c 6,000 Dec 31 By Bank A/c 21,000

Dec 31 By Bank c/d 35,000

66,000 66,000
2005 By Bank A/c
Dec31 35,000 21,000
2005Jan To Bal b/d
Dec31 4200 Dec31 By Balance c/d 18,200
Dec 31
2006 39,200 39,200
 Advanced Accounting 5.19 Hire Purchase system - I

Jan1 To Interest A/c 2006

To Bal b/d 18,200

Dec31 To Interest A/c 2,800 Dec31 By Bank A/c 21,000

21,000 12,000

Interest Account
Date Particulars Amount Date Particulars Amount
Rs. Rs.

2004 To P & L Account 6,000 2004 By y’s Account 6,000

Dec1 Dec31

2005 2005

Jan1 To P & L Account 4,200 Dec31 By y’s Account 4,200

2006 2006

Dec31 To P & L Account 2,800 Dec31 By y’s Account 2,800

2nd Method :
Journal Entries
Date Particulars L.F. Debit Credit
Rs. Rs.

2004 y’s Account Dr 73,000

Jan1 To Interest suspense A/c 13,000
To Hire sales Account 60,000
(Being Machine sold on Hire) and
total interest payable for it)
Jan1 Bank Account Dr Dr 10,000
To y’s Account 10,000
(Being down payment received)

Dec 31 Interest suspense Account Dr 6,000

To Interest A/c 6,000
(Being Interest due in 1st instalment)
Dec 31 Bank Account Dr 21,000
To y’s Account 12,000
(Being 1st instalment received)
Dec31 Interest Account Dr 6,000
 Centre For Distance Education 5.20 Acharya Nagarjuna University

To Profit & loss Account 6,000

(Being interest transferred to P & L
Account)
2005 Interest Suspense Account Dr 4,200
Dec31 To Interest Account 4,200
(Being interest due)
Dec31 Bank Account Dr 21,000
To y’s Account 21,000
(Being 2nd instalment received)
Dec31 Interest Account Dr 4,200
To Profit & Loss Account 4,200
(Being interest transferred to
P & L Account)

Dr y’s Account Cr
Date Particulars Amount Date Particulars Amount
Rs. Rs.

2004 To H. Sale 60,000 2004Jan1 By Bank 10,000

Jan1 To Interest sus A/c 13,000 Dec 31 To Bank 21,000
Dec 31 Bal c/d 42,000

73,000 73,000
2005 By Bank
42,000 21,000
2005Jan Bal b/d
2006 Dec31 By Bal c/d 21,000
Jan1
To Bal b/d
2006 42,000
42,000
 Advanced Accounting 5.21 Hire Purchase system - I

Dec31 By Bank

21,000
21,000
21,000
21,000

Dr Interest suspense A/c

Cr
Dat Partic Amount D Particul
e ulars at ars Amoun
e t
Rs.
R
s.
200 To 6,000 20 By 13
4 Intere 04 y’s ,0
st Acco 00
A/c unt
Dec To 7,000 Ja
31 Bal n1
c/d 13
,0
200 20 00
5 To 05
Intere
st
A/c
Dec 2,800 Ja By 7
31 n1 Bal ,
b/d 0
0
200 20
6 06 0
7,000 7
,
0
0
0

Dec To 2,800 Ja By 2
31 Intere n1 Bal ,
st b/d 8
A/c 0
0
2,800 2
,
8
0
0
 Centre For Distance Education 5.22 Acharya Nagarjuna University

When there are different amount of instalments.

Surya purchased a machine on hire purchase system. The total cash price of the machine is
67,000, payable Rs 16,000 down and there instalments of Rs 24,000 Rs. 20,000 and Rs. 18,700 payable
at the end of the first, second and third year respectively. Interest is charged at 5% P.a. Charge
depreciation at 10% on straight line method. Prepare ledger Accounts in the books of surya.

Solution :
calculation of Interest and Depreciation
Interest Cash Price Deprecation

year of Payment Total Instalment

Price
Machine Purchased 67,000

Down Payment 8,000 8,000 ---- 8,000 -----

59,000

At the end of 21,050 24,000 2,950 21050 6,700

1st year 1900
At the end of 37,950 20100 6,700
2nd year
20,100 22000

17,850

At the end of 6700

3rd year

17,850 18,700 850 17850

Nil 72700 5700 67000
 Advanced Accounting 5.23 Hire Purchase system - I

Dr Machinery Account Cr
Date Particulars Amount Date Particulars Amount

Rs. Rs.

To Hire vendor A/c 67,000 Year end By Depreciation 6,700

end By Bal c/d 60,300

67,000 67,000
 Centre For Distance Education 5.24 Acharya Nagarjuna University

2ndTo Bal b/d2nd yearBy Depeciation

Yearend By Bal c/d

3rdTo Bal b/d3rd yearBy Depreciation endBy

Bal c/d

4thTo Bal b/d

Dr Hire vendor
Account Cr
Date Particulars Amount Date Particulars Amount
Rs. Rs.

1st year To Bank A/c 8,000 1st Year By Machinery 67,000

To Bank A/c 24,000 By Interest 2,950

To Bal c/d 37,950

69,950 69,950
To Bank A/c
2nd 22,000 2nd year By Bal b/d 37,950
year To Bal c/d 17,850 end Interest A/c 19,000
39,850 39,850
3rd To Bank 3rd year By Bal b/d
18,700 17,850
end By Interest A/c 850
By (bal fig)
18,700 18,700

Dr Interest Account Cr
Date Particulars Amount Date Particulars Amount

Rs. Rs.

1st To Hire vendor 2,950 1st By Profit & loss 2950

2nd To Hire vendor 2nd By P & L A/c

3rd To Hire vendor 3rd By P & L A/c

1900
1900

850
850
Dr Depreciation Account Cr
Date Particulars Amount Date Particulars Amount
 Advanced Accounting 5.25 Hire Purchase system - I

Rs. Rs.

1st To Machinery 6,700 1st By P & L A/c 6,700

2nd To Machinery 2nd By P & L A/c

6,700 6,700
3rd To Machinery 3rd By P & L A/c
6,700 6,700
When the instalments are exclusive of interest :
Illustration – 3 :
On 1st January 2,000 vindhya purchased a machine from Nivedita on Hire - purchase basis. The
particulars are as follows;
Cash price is Rs 50,000 payable as follows on signing the agreement Rs 20,000 and balance in
three instalments of rs 10,000 each plus interest. Interest is charged at 5% on outstanding balance
Depreciation at 10% p.a on written down value method. Prepare Nivedita Account in the books of
vindhya.
Dr Nivedita Account
Cr
Date Particulars Amount Date Particulars Amount

Rs. Rs.

2000 Jan 1 To Bank A/c 20,000 2000 By Machinery A/c 50,000

Dec 31 To Bank A/c 11,500 Jan1 By Interest A/c 1,500

Dec31 To Balance c/d 20,000 Dec31

2001 51,500 2001 51,500

Dec31 To Bank A/c 11,000 Jan1 By Bal b/d 20,000

Dec 31 To Bal c/d 10,000 Dec31 By interest A/c 1,000

2002 21,000 2002 21,000

Dec31 To Bank A/c 10,500 Jan1 By Bal b/d 10,000

Dec31 By interest A/c 500

10,500 10,500

Calculation of interest when rate is not given

 Centre For Distance Education 5.26 Acharya Nagarjuna University

If the rate of interest is not given in the problem, first total interest will be calculated by deducting
cash price from the total hire purchase price. Then the total interest is distributed in the ratio of
outstanding balance of each year.
Illustration 4 :
On 1st January 2000 Akhil took delivery from Nikhil co Ltd of a machine on hire purchase
system. Rs 6000 being paid on delivery and the balance in five instalments of Rs 12,000 each payable
annually on 31st December. The cash price of the machine was Rs 60000. Calculate the amount of
interest of each year.
Solution : Rs

2000 Amount Outstanding After down payment 60,000

2001 Amount Outstanding After 1st instalment 48,000

2002 Amount Outstanding After 2nd instalment 36,000

2003 Amount Outstanding After 3rd instalment 24,000

2004 Amount Outstanding After 4th instalment 12,000

Total interest for all the five years is Rs 6,000. (66000 - 60000) Which should be divided in the ratio of
5 : 4 : 3 : 2 : 1 for five years.
Hence the interest comes to

2000 Rs 6,000 5 = Rs 2000

2001 Rs 6,000 5 = Rs 1600

2002 Rs 6,000 5 = Rs 1200

2003 Rs 6,000 5 = Rs 800

2004 Rs 6,000 5 = Rs 400

Calculation of cash price when it is not given

 Advanced Accounting 5.27 Hire Purchase system - I

Sometimes in the question the cash price is not given. For solving the problem first we have to
find out the cash price with which the asset account is debited For calculating the cash price first take
the final instalment an deduct interest from it. Interest can be calculated by using the formula = Rate of
interest /100 + rate of interest. The remaining amount after deducting the interest represents the amount
due at the beginning of the year. The opening balance of the current year also represent the closing
balance of the previous year after payment of instalment. The total of these two will give the amount
due at the end of the last but one year. This procedure followed until the first instalment To that amount
add down payment then we can find the cash price of the asset this can be better understood with the
following illustration.
Illustration 5 :
On January 1st sai purchased a machine on Hire Purchase under a Hire purchase agreement
which provided for an initial payment of Rs 30,000 and the balance in four equal annual instalments of
Rs 40,000 each, rate of interest is 6% per annum find out the cash price of the machine.
Solution:
No of Balance Amount of Total Interest Opening balance

instalments Rs instalments Rs at 6/106 Rs

4 Nil 40,000 40,000 2264 37,736

3 37,736 40,000 77,736 4400 73,336

2 73,336 40,000 1,13,336 6415 1,06,920

1 1,06,920 40,000 1,46,920 8320 1,38,600

Cash = 1,38,600 + 30,000(Down payment) = Rs 1,68,600

Illustration 6 :

Little Masters purchase a machinery on instalment basis from Machine Manufacturing co Ltd on
the following terms :

a. Cash down payment at the time of signing agreement Rs 24,000

b. Five annual instalments of Rs 15,400
c. Interest at 10% p.a, is charged by the seller.
d. Depreciation at 20% p.a. on W,D.V basis is written off on machinery.
 Centre For Distance Education 5.28 Acharya Nagarjuna University

g. Machinery is sold for Rs 30,000 on completion of payments of instalments show the machinery
account for the entire period.
Solution :

Calculation of Cash Price.

No of Balance Amount of Total Interest Opening balance

instalments Rs instalments Rs at 6/106 Rs

V NiLL 15,400 15,400 1,400 14,000

IV 14,000 15,400 29,400 2,672 26,728

III 26,728 15,400 42,128 3,830 38,298

II 38,298 15,400 53,698 4,882 48,816

 Advanced Accounting 5.29 Hire Purchase system - I

I 48,816 15,400 64,216 5,838 58,378

Cash Price = 58,378 + 24,000 (Down payment) = Rs 82,378

5.9 SUMMARY :

Most of the trade now - a - days carried on the basis of not only on credit but also under instalment
payment, under hire purchase system the buyer acquires the possession of the goods immediately and
agrees to pay the remaining balance in instalments. After payment of last instalment the ownership of
goods is passed from the seller to buyer. If the buyer makes default in payment of instalment the seller
has right to take back the goods from the buyer. The amount already paid is treated as hire charges for
using the asset.

5.10 SELF ASSESSMENT QUESTIONS :

1. What do you mean by hire - purchase system ?

2. What is instalment purchase ?
3. Write down the differences between hire purchase and instalment purchase.
4. Write down the features of hire - purchase system.
5. Explain the methods of recording hire purchase transactions in purchaser’s book.
6. Explain cash price hire purchase price and down payment.
7. In the absence of Interest rate how can it be calculated ?
8. In the absence of cash price, how can it be calculated ?

5.11 EXCERCISES :
1. Nani purchased a Machine under hire purchase system at a cash price of Rs 56,000. He has to
make down payment of Rs 24,000 Further he has to make payment of Rs 10,000 each in four
annual instalments. Calculate the interest included in each instalment.
2. PQR company purchased an asset from EFG Co Ltd. On 1-1-2000 on hire purchase system and
paid Rs 30,000 at the time of signing the agreement and agreed to pay the balance in four equal
instalments of Rs 40,000 each on 31st December every year. Vendor company charges 5% rate
of interest per year depreciate the asset at 10% p.a. On straight line mouthed. Write up the ledger
accounts in the books of both the parties.
3. Mr. Venkat purchased a machine from Hari on 1st January 2000 on Hire purchase system. The
cash price of machine Rs 50,000. Down payment is Rs 26,000. Balance in three equal instalments
of Rs 10,000 each. Find out how much interest is included in each instalment.
4. Mr. Kartik purchased a truck on Hire purchase system for Rs 56,000. Payment to be made Rs.
15,000 down and three instalments of Rs 15,000 each at the end of each year. The rate of interest
is charged at 5% p.a. on the balance due. The purchaser is depreciating the truck at 10% p.a. on
reducing balance method. Write down the necessary journal entries and ledger accounts to record
the above transaction in the books of both the parties.
 Centre For Distance Education 5.30 Acharya Nagarjuna University

5. On 1st April 2002. Somu purchased a machine on hire purchase by paying Rs 1,500 as initial
payment and the balance in four equal instalments of Rs 2,000 each at the end of every year. The
rate of interest charged is at 6% p.a. Determine the cash price of the machine.
6. 1-4-2000. Surat Transport company purchased from Metro Motors Ltd., three trucks costing Rs
5,00,000/- each on Hire purchase system. Payment was to be made, Rs 3,00,000 down and the
remainder in three equal instalments together with interest at 9% p.a. at the end of each year.
Surat transport company writes off depreciation at 20% on reducing balance. Write up the
necessary ledger accounts in the books of both the parties.
7. Mr. white purchased a Machinery on hire purchase system and agreed to pay in five instalments
at the end of each year, It also agreed to pay interest at 10% p.a. on the balance due of cash price
every year. Calculate the interest included in each instalment.
Instalment Amount paid
Rs
1 2,250
2 2,100
3 1,950
4 1,800
5 1,650
8. A Ltd purchased three Buses from B Ltd costing Rs 75,000 each on Hire purchase system.
Payment was to be made Rs 45,000 cash down and the remainder in three equal yearly
instalments together with interest at 12% p.a B Ltd writes off depreciation at 20% p.a on
diminishing balance method. Prepare necessary Accounts in the books of A Ltd.
9. Mr. Mani purchased a machine under Hire - purchases agreement from siddhartha Motars a
machine costing Rs 31,000, The payment was to be made as follows.
Rs
on siging the agreement 6,000

1st, 2nd & 3rd instalments 10000 each

Calculate interest for each year.

10. The Rajastan Transport company purchased three lorries from leyland Motars on Hire purchase
system on 1st January 2000. Paying cash Rs 20,000 and agreeing to pay further three instalments
of Rs 20,000 each on 31st December each year the cash price of the lorry is Rs 74,500. And the
leyland Ltd charge interest at 5% p.a The Madras Transport company writes off 10% o.a. as
depreciation on the reducing instalment system. Pass Journal entries and prepare necessary ledger
accounts in the books of Rajastan Transport company.
11. A company hires a machine on the hire purchase system. The hire purchase price was Rs. 32,000
payable Rs. 8,000 down and rest in three instalments of Rs 8,000 company is writing off
depreciation at 10% on written down value, open necessary ledger accounts in the books of the
company.
12. Nikhil delivers a machine on hire purchase system for Rs 150,000 including interest at 10% p.a.
on cash value to be paid as follows, Down payment Rs 24,000 1st instalment Rs 36,000, 2nd
instalment Rs 66,000 and third instalment Rs 24,000 at end of each year. Show ledger accounts
in the books of vendor.
 Advanced Accounting 5.31 Hire Purchase system - I

13. Anirudh purchases a L.C.D TV set on Hire purchase basis for Rs 1,00,000 and makes the payment
in the following order.
Down payment Rs 20,000
1st instalment Rs 40,000
2nd instalment Rs 20,000
3rd instalment Rs 20,000
The cash Price is Rs 86,000
Prepare necessary ledger account in the books of vender.
14. Gowtami purchased a truck on Hire purchase system. The cash price of the truck was Rs 1,49,000.
He paid Rs 40,000 on signing of the agreement and rest in three annul instalments of rs 40,000
each calculate interest for each year.
15. Sahiti purchased an asset on hire purchase system on agreement to pay as follows. On down
payment Rs 40,000 at the end of first year Rs 56,000, at the end of second year 52,000, at the end
of third year Rs 48,000 and at the end of fourth year Rs 44,000. Annul interest rate is 10% prepare
necessary ledger accounts in the books of both the parties.

5.12 SUGGESTED READINGS :

Financial Accountancy : Shukla Grewal

Financial Accountancy : Jain and Narang
Financial Accountancy : R.L. Gupta & V.K. Gupta

Dr. Ch. Suravinda

 LESSON - 6

HIRE PURCHASE SYSTEM- II

OBJECTIVES : In the previous lesson you learned what is Hire purchase ? How these transactions
are recorded in the books of both hire purchaser and hire vendor. Already we learned that if a hire
purchaser failed to pay any instalment the hire vendor had a right of repossession. After going through
the current lesson the student can know how the transactions of repossession recorded in the books ?
What is instalment system ? What is the difference between these two ?

STRUCTURE OF THE LESSON :

6.1 Introduction
6.2 Types of repossession
6.3 Accounting treatment in case of partial repossession
6.4 Accounting treatment in case of small value items
6.5 Hire purchase trading Account
6.6 Stock and Debtors system
6.7 Summary
6.8 Self Assessment Questions
6.9 Exercises
6.10 Suggested Readings

6.1 INTRODUCTION :
When the hire purchaser failed to pay any instalment the vendor has a right to repossess the goods
sold on hire purchase. The amount already paid is forfeited by treating it as hire charges for using the
asset.

6.2 TYPES OF REPOSSESSION :

There are two methods of repossession. They are :
1. The vendor takes the complete repossession of asset and
2. The vendor takes repossession of only a part of the total asset sold on hire purchase
system. This is known as partial repossession.
The accounting treatment for these two methods is different. Hence, we discuss them
separately.
Accounting treatment in case of complete repossession
In the books of Hire purchaser :
The following steps should be followed by the student to record the transactions relating to
complete repossession :
1. In the year of default, entries for interest and Depreciation should be passed as usual
that means except the entry for payment, all the entries are passed.
2. Close the account of vendor by transferring the balance to asset account by debiting the
vendor's account and crediting the asset account.
 Centre For Distance Education 6.2 Acharya Nagarjuna University

3. Balance left in the asset account will represent loss on default and will be closed by
transferring to the profit and loss account.
In the books of vendor :
The following steps are necessary in the books of vendor in case of complete repossession.
1. Entry for interest due is passed as usual in the year of default.
2. Close the account of hire purchaser by transferring its balance to repossessed stock
account i.e. hire purchaser account is credited and repossessed stock account is Debited.
3. The repossessed stock account is further debited with expenses incurred in repairing or
overhauling.
4. When these stock is sold again, with the sale price, the repossessed stock account is
credited.
5. The balance in this account represent either profit or loss, this account is closed by
transferring this balance to profit and loss account.
This can be better understood with the following illustration.
Illustration – I :
M/s Sri Rama Motar transport Co purchased a truck on hire-purchase system for Rs.2,50,000 on
Ist January 2004. Payment to be made Rs.1,00,000 down and three annual instalments of Rs.75,000
each payable on 31st December every year. Rate of interest is 25% per annum. The buyer depreciates
the truck at 20 percent per annum on written down value method.
Because of Financial difficulties M/s. Sri Rama Motor Transport Co, after having paid down
payment and first instalment at the end of Ist year, could not pay second instalment and the vendor
took possession of the truck. Vendor, after spending Rs.75,000 on repairs of the asset sold it away for
Rs.1,62,500/-
Open necessary ledger accounts in the books of both the parties to record the transactions of
repossession.
Solution :
Calculation of Interest and Depreciation
Date of Payment Total Instal- Interest Cash Price Depreci-
Cash Price ments ations

Ist Jan 2004 2,50,000

Down Payment 1,00,000 1,00,000 --- 1,00,000 ---

31st Dec 2004 1,50,000 75,000 7,5000
37,500 37,500 50,000
1,12,500
31st Dec 2005 46,875 75,000 28,125 46,875 40,000
31st Dec 2006 65,625 75,000 9,375 65,625 32,000

65,625 75,000 9,375 65,625 32,000

Nil 3,25,000 75,000 2,50,000

In the books of Sri Rama Motor transport company

 Advanced Accounting 6.3 Hire Purchase System - II

Truck Account Cr
Year Particulars Amount Year Particulars Amount
Rs. Rs.

2004 2004

Jan 1 To Bank A/c 1,00,000 Jan 1 By Truck A/c. 2,50,000

Dec31 To Bank A/c 75,000 Dec 3 By Interest A/c 37,5000
Dec 3 Balance C/d 1,12,500
2,87,500
2,87,500
2005 2005

Dec 3 To Truck A/c 1,40,625 Jan 1 By Balance b/d 1,12,500

Dec 3 By Interest a/c 28,125

1,40,625 1,40,625
In the Book of Hire Vendor
Sri Rama Motar Transport Company
Year Particulars Amount Year Particulars Amount
Rs. Rs.

2004 2004

Jan 1 To Sales a/c 2,50,000 Jan 1 By Bank A/c 1,00,000

Dec31 To Interest a/c 37,500 Dec 3 By Bank a/c 75,000
By Balance c/d 1,12,500

2,87,500 2,87,500

2005 2005
Jan 1 To Balance b/d 1,12,500 By Respossed stock 1,40,625
 Centre For Distance Education 6.4 Acharya Nagarjuna University

Dec31 To Interest a/c 28,125

1,40,625 1,40,625
Repossessed Stock Account
Dr Cr
Year Particulars Amount Year Particulars Amount

Rs. Rs.

2005 2005

Dec31 To Sri Rama Dec 31 By Bank 16,2,500

Motor Transport
Company A/c 1,40,625
Dec31 To Bank a/c 7,500

Dec31 To P & L A/c 14,425

1,62,500 1,62,500

6.3 ACCOUNTING TREATMENT IN CASE OF PARTIAL REPOSSESSION :

The following method is followed in case the seller takes possession of only part of the total
assets sold to buyer.
1. In the year of default also pass the entries for interest due and for depreciation as done in
the case of complete repossession.
2. In this case both buyer and seller do not close seller's and buyer's account in their
respective books. The entry is passed with the agreed value of the asset which is taken
away by the seller. The seller always calculate the asset value taken over at a higher rate
of depreciation.
3. The buyer finds out the value of asset still left with him using the normal rate of
depreciation with this balance the asset account is continued, i.e. this account shows the
balance of that asset which is left to him by the seller.
4. After crediting the asset account with the value of asset taken away by the seller and after
keeping the balance of the asset left as calculated above the difference shown by the asset
account represents either profit or loss on default. This difference is transferred to profit
and loss account.
This can be better understood by the following illustration.
Illustration II :
A Transport company purchased 2 trucks costing Rs.1,60,000 each from Seshagiri Auto Ltd.,
on Ist January 2004, on the basis of hire purchase system. The terms were; payment on delivery
Rs.40,000 for each truck. Remainder in 3 equal instalments together with interest at 10% per annum
to be paid at the end of each year.
 Advanced Accounting 6.5 Hire Purchase System - II

Transport company writes of off 25% depreciation each year on the diminishing balance method.
Transport Ltd paid the instalments due on 31st December 2004 and on 31st December 2005 but could
not pay the final instalment.
Seshagiri Auto Ltd., repossessed one truck adjusting its value against the amount due. The
repossession was done on the basis of 30% depreciation on the diminshing balance method. The vendor
spend Rs.16,000 for the repairs and over hauling of the truck and sold it for Rs.80,000.
Write up the ledger accounts in the books of both parties.
Solution :
In the books of Transport company

Auto Ltd A/c

Trucks Account Cr

Dr. Seshagiri Auto Ltd. Cr

Year Particulars Amount Year Particulars Amount
Rs. Rs.

2004 2004

Jan 1 To Bank 80,000 Jan 1 By Trucks A/c 3,20,000

To Bank 1,04,000 Jan 1 By Interest A/c 24,000

Dec31 To Balance c/d 1,60,000

3,44,000 3,44,000
2005

2005
Dec31 To Bank A/c 96,000 Jan 1 By Balance b/d 1,60,000
 Centre For Distance Education 6.6 Acharya Nagarjuna University

Dec31 To Balance c/d 80,000 Dec 31 By Interest A/c 16,000

1,76,000 1,76,000
2006 2006

Dec31 To Truck A/c 54,880 Jan 1 By Balance b/d 80,000

Dec 3 To Balance c/d 33,120 Dec 31 By Interest A/c 8,000
88,000 88,000
2007
Jan 1 By Balance b/d
33,120
In the books of Seshagiri Auto ltd.
Dr. Transport Company Account Cr
Year Particulars Amount Year Particulars Amount
Rs. Rs.

2004 2004

Jan 1 To Sales A/c 3,20,000 Jan 1 By Bank A/c 80,000

Dec31 To Interest A/c 24,000 Jan 1 By Bank 1,04,000
Dec 31 By Balance c/d 1,60,000

3,44,000 3,44,000
2005

2005
Jan 1 To Balance b/d 1,60,000 Dec 31 By Bank A/c 96,000
Dec31 To Interest A/c 16,000 Dec 31 By balance c/d 80,000
1,76,000 1,76,000
2006 2006

Jan 1 To Balance b/d 80,000 Dec 31By Repossessed Stock A/c 54,880
Dec31 To Interst 8,000 By Balance c/d 33,120
A/c To Balance
88,000 88,000
2007 b/d
Jan 1
33,120

Dr Re possessed Stock Account

Cr

Cost 2004 1,60,000

Less: Dep. at 30% P.A. 48,000
 Advanced Accounting 6.7 Hire Purchase System - II

Balance on 1-1-2005 1,12,000

Less : Dep. for 2005 @ 30% 33,600

Balance on 1-1-2006 78,400 Less : Dep. for

2006@ 30% 23,520
2. Value of truck retained :
Cost 2004 1,60,000
Less : Dep. for 2004 @25% 40,000

Balance on 1-1-2005 1,20,000

Less : Dep. for 2005 @ 25% 30,000

Balance on 1-1-2006 90,000

Less : Dep. for 2006@ 25% 23,500

67,500

6.4 ACCOUNTING TREATMENT FOR SALES OF SMALL VALUE ITEMS :

When seller sells goods of small value on hire purchase system, it may become inconvenient for
him to maintain separate accounts for each customer, as in the case of considerable high value items.
Hence under such circumstances he maintains a subsidiary book and records there the date of contract,
name of customer, description of the article, number of instalments and dates of payment of instalments.
Profit for this type of business is calculated in two ways 1. by preparing hire- purchase trading
account and 2. by preparing hire purchase adjustment account. In detail we will see how these accounts
are prepared.

6.5 HIRE PURCHASE TRADING ACCOUNT :

To prepare a hire purchase trading account the following information is needed.

1. Opening Stock : This information is not needed if the business is run as a department of
the main shop. Like simple trade account, this figure is shown on the debit side of hire-
purchase trading account.
 Centre For Distance Education 6.8 Acharya Nagarjuna University

2. Instalment unpaid and not due : This information is needed whether the business is run
as a department or as an independent business. This information is available at hire
purchase price so it must be reduced to cost price and then shown on the debit side of
hire-purchase trading account.
3. Purchases : If the business is run independently then purchases term is used. But when
business is run as a department, then the information relating to purchases made by the
department is given under the term, 'goods sold during the year'. Since goods sold during
the year are given at hire purchase price, they are reduced to cost price. This is shown on
the debit side of hire purchase trading account.
4. Sales : Hire purchase trading account is credited with sales. But in hire purchase trading
account, instead of showing single figure of sales three figures are shown. Opening
balance of instalments due but not received is shown on the debit side of the trading
account and cash received from customers during the year and closing balance of
instalments due but not received are shown on the credit side.
5. Stock at the end : This is shown on the credit side of hire purchase trading account except
in case of department of the main shop.
6. Stock with customers : This is shown on the credit side of hire-purchase trading account
as cost price irrespective of the type of business. It is also termed as instalments unpaid
and not due.
This can be better understood with the following illustration.
Illustration 3 :
Vinod sells goods on hire-purchase system at cost plus 60 percent. From the following prepare
Hire-purchase Trading Account.
2006
April 1 Goods out on hire purchase at Rs.
hire purchase price 1,60,000
2007 March 31 Instalments not due and unpaid 3,60,000
Instalments due and unpaid 20,000
The following transactions took place during the year :
1. Goods sold on hire purchase system at hire purchase price 8,00,000
2. Cash received from customers on hire purchase price 5,60,000
3. Goods received back on default (Instalments due Rs.20,000)
valued at 4,000
Solution :
 Advanced Accounting 6.9 Hire Purchase System - II

Hire Purchase Trading Account Cr.

Note : When goods are received back they are included into stock at cost price or market price
whichever is lower and are shown in the trading account on the credit side.
Illustration 4 :
Vyshnavi & Co has a hire-purchase department and goods are sold on hire-purchase at cost
plus 60%. From the following information prepare Hire purchase Trading Account to ascertain the
profit or loss made in the hire-purchase department.
2006
April 1 Goods with Hire purchase customers at (H.P. Price) 3,20,000

March 31 Goods sold on hire-purchase during the year at H.P. price 16,00,000 Cash
received during the year from customers 11,20,000 Repossed goods
valued at (Instalments due Rs.40,000) 6,000
Goods with the H.P. customers at H.P. price 7,20,000

Solution :
Vyshnavi & Co

Hire
purchase Trading Account Cr.
 Centre For Distance Education 6.10 Acharya Nagarjuna University

Dr. Instalments due Account Cr.

Date Particulars Amount Date Particulars Amount
Rs. Rs.

2007 2007

Mar31 To H.P. Trading A/c. 40,000 Mar 31 By Balance c/d 40,000

40,000 40,000
Aprl1 To Balance b/d
40,000

Dr. Hire Purchase Stock Account Cr

Date Particulars Amount Date Particulars Amount
Rs. Rs.

2007 2006

APrl1 To Balance b/d 3,20,000 April 1 By H.P,. Trading 3,20,000

A/c. (transfer)
Mar31 To H.P. Trading A/c 7,20,000 Mar 31 By Balance c/d 7,20,000
To Balance b/d 7,20,000

Dr. Stock Reserve Account Cr.

Date Particulars Amount Date Particulars Amount
Rs. Rs.

2007 2006

Mar31 To H.P. Trading A/c 1,20,000 Aprl.1 By Balance b/d 1,20,000

(Transfer)

2007 2007

Mar31 To Balance c/d 2,70,000 Mar.31 By H.P. Trading A/c 2,70,000

Aprl By Balance b/d 2,70,000

Working
Calculation of instalments due : Rs.
Op.Stock (H.P. Price) 3,20,000
Good sold 16,00,000
19,20,000
 Advanced Accounting 6.11 Hire Purchase System - II

Rs.

Less : Cash received 11,20,000

Repossessed goods (H.P. Price) 40,000

Stock with customers 7,20,000 18,80,000

Instalments due 40,000

6.6 STOCK AND DEBTORS SYSTEM :

Under this method the following ledger accounts are prepared
1. Hire purchase stock account

2. Shop stock account

3. Hire purchase debtors account

4. Goods on hire -purchase account.

5. Hire purchase adjustment account.

The following journal entries are passed to record the transactions under this system.
1. When goods are made available for sale on hire purchase:
Shops stock A/c Dr
To Purchase A/c (at Cost price) (Being
goods available for Sale)
2. When goods sold on HP.
Hire purchase stock A/c Dr
To goods sold on H.P. A/c
(at sale price)
Goods sold on H.P. A/c (Sale price) To Dr
Shop stock A/c (Cost price)
To H.P. Adjustment A/c
3. When instalments become due
Hire purchase debtors A/c To Hire Dr
purchase Stock A/c
4. When cash is received
Cash A/c Dr
To Hire purchase Stock A/c
5. For loading included in instalment not due
H.P. Adjustment A/c Dr
To Stock Reserve A/c
6. For instalments not paid of repossessed goods
Repossessed goods A/c Dr
To Hire purchase debtors A/c
 Centre For Distance Education 6.12 Acharya Nagarjuna University

7. For Profit
H.P. Adjustment A/c
To P & L A/c
8. For Loss
P & L A/c Dr
To H.P. Adjustment A/c
Illustration 5 :
A trader sold out goods on hire purchase at a profit of 25% on cost price. Prepare a. Hire
purchase stock Account b. Shop stock account and cl. Hire purchase Debtor’s account in the books of
the Trader from the following details.
Stock in godown : Rs.
On 1-4-2006 1,20,000
On 31-3-2007 Over 1,00,000
due instalments :
On 1-4-2006 8,000
On 31-3-2007 12,000
Goods with customers on hire purchases
On 1-4-2006 1,44,000
Purchases 2,58,400
Instalments received 2,40,000
Solution :
H.P. Stock A/c
Date Particulars Invoice Amount Date Particulars Invoice Amount

Rs. Rs.

1-1-06 To Bal b/d 1,44,000 1,15,200 31-3-07 By H.P.

Debtors A/c
2,44,000 2,44,000
31-3-07 To Goods sold 3,48,000 2,78,400 31-3-07 By Bal c/d 2,48,000 1,98,400
31-3-07 To Gross profit --- 48,899

4,92,000 4,42,400 4,92,000 4,42,400

Dr. Shop Stock A/c Cr.

Date Particulars Amount Date Particulars Amount
Rs. Rs.

1-4-06 To Bal b/d 1,20,000 31-307 By Cost of goods

31-3-07 To purchase A/c 2,58,400 31-3-07 Sold on H.p. 2,78,400

31-3-07 (Bal fig)
 Advanced Accounting 6.13 Hire Purchase System - II

31-3-07 By Bal c/d 1,00,000

3,78,400 3,78,400

H.P. Debtors A/c

6.7 SUMMARY :

The hire - vender can repossess the goods sold on hire purchase if the purchaser commits
default in payment of any instalment Repossession can be complete or partial. Partial repossession
occurs when the vender sells different goods on hire purchase to the same party and allows him to
continue his business with goods not repossessed. When hire purchase transactions are of small value,
the hire vender may prepare Hire purchase trading account on stock method. Under stock and debtors
method, hire purchase stock account, goods on hire purchase account and Hire purchase adjustment
account are prepared.
6.8 SELF ASSESSMENT QUESTIONS :

1. What is Hire purchase trading account ? Why is it prepared ? Give a proforma.

2. What is the difference between hire purchase trading account and Hire purchase
adjustment account.
3. Explain the methods of repossession.

6.9 EXERCISES 1 :

1. X Purchased a machine on 1st Jan 2000 on Hire - purchase system. The cash price of the machine
is Rs 149000. The terms of the agreement provided for payment of Rs 40,000 at the end of every
six months over two years. The first payment was to be made on 30th June 2000. Rate of interest
is 6% p.a. Wrote off 10% Depreciation on the reducing balance system and closed his books on
30th June every year. Could not pay the instalment due on 30th June 2001 and as a result, the
hire vender took back the machine give the machine a/c and vender account in the books of X.
2. Y Ltd purchased a machine from Z Ltd on 1st January 2001 on the Hire purchase system. The
cash price of the machine was Rs.1,20,000, payment was to be made Rs 40,000 half yearly over
two years. The first payment was to be made on 30th June 2001. Rate of interest 5% p.a.
Depreciation to be written off @ 10% p.a on the diminishing balance method. The books of
 Centre For Distance Education 6.14 Acharya Nagarjuna University

accounts were closed on 30th June every year. The instalment due on 30th June 2002 could not
be paid and as a result of which the vender took repossession of the machine. Prepare machine
account and hire vender account in the books of Ltd.
3 Pavan purchased six trucks on hire - purchase on 1st July 2002. The cash price of each truck was
Rs 2,50,000. He was to pay 20% of the cash purchase price at the time of delivery and the balance
in five yearly instalments starting from June 2003 with interest at 20% per annum.
On pavan’s failure to pay the instalment due on June 2004 it was agreed that pavan would return
3 trucks to the vendor and remaining would be retained by him. The returned trucks were valued
at 30% per annum where as pavan depreciates trucks at 20% p.a. Vender after spending Rs 5000
on repairs sold away all the three trucks for Rs 2,00,000 Show necessary accounts in the books
of both the parties.
4. On January 2000 Yogesh acquires 3 machines on hire purchase from Somesh at 10% p.a interest
Yogesh immediately pays Rs 1,20,000 and also agrees to pay in three annual instalments of
Rs. 2,00,000 each. The first instalment becoming due at Dec 31, 2000. Yogesh duly pays the
first instalment but fails to pay thereafter, on yogesh’s default somesh repossessed all machines
yogesh is charging depreciation at 20% p.a on straight line basis at 31st December each year,
show the relevant ledger accounts in the books of both the parties.
5. Naveen purchased four machines of Rs 70,000 each from Praveen under hire purchase system.
The down payment is Rs 75,000 and three instalments of Rs 75,000 each at the end of each year.
Naveen depreciates the machines at 10% per annum on the straight line method. Down payment
and first instalment were paid. Naveen could not pay the second instalment and therefore praveen
took back three machines leaving one machine with Naveen. The machines were taken at 20%
depreciation on written down method. Praveen repaired the machines at a cost of Rs 15,600 and
sold them for Rs 1,75,000.
Prepare necessary ledger accounts in the books of both the parties.
6. Nitin sells goods on hire purchase price which is made of profit at 50% on hire purchase Price.
Calculate profits from the information given below by preparing Hire Purchase trading and Hire
- purchase adjustment accounts.
2006 Rs.
April Instalments due 4,50,000
2007
March 31 Instalments due during the year 12,00,000
Cash received during the year 15,00,000
goods sold during the year Instalments 12,60,000
unpaid (not due)
On 31 March 2007 3,00,000
Goods repossessed during the year
(amount due 15,000) valued at 1,500
7. Rajesh sells goods at hire - purchase price. Hire purchase price is made of profit at 50% on hire
purchase price. Calculate profit from the information given below by preparing hire purchase
trading account.
 Advanced Accounting 6.15 Hire Purchase System - II

2007 Rs.

Jan 1 Instalments due in the beginning 75,000

Dec 31 Instalments due during the year 2,00,000
Cash received during the year 2,50,000

goods sold during the year Instalments un 2,10,000

paid (not due)
on 31st December goods 50,000
repossessed during
the year (amount due Rs 2,500) 500

8. Comfort furnishers supply the furnishing on hire purchase. Terms at a profit of 50% over the
cost. The following are the transactions for the year ended 31st Dec 2007.
2007 Rs.

Jan 1 stock out on hire at cost 1,20,000

Jan 1 Instalments due (customers still paying) goods 10,800
repossessed during the year
(for instalments unpaid) evaluated at 900

instalments realised during year. 234000

Dec31 stock out on hire at cost 114000

Dec 31 Instalments due (customers still paying) 18,000
Prepare hire purchase stock account Hire purchase debtors account and Hire- purchase
adjustment account.

6.10 SUGGESTED READINGS :

Financial Accountancy : Shukla Grewal

Financial Accountancy : Jain and Narang
Financial Accountancy : R.L. Gupta & V.K. Gupta

Dr. Ch. Suravinda

 LESSON - 7
PARTNERSHIP ACCOUNTS I – ADMISSION OF A PARTNER
OBJECTIVES :

After going through the lesson you will be able to understand the following:
1. Definition and meaning of partnership.
2. Accounting procedure while a new partner joins the partnership.
3. Method of calculating goodwill in view of admission.

STRUCTURE OF THE LESSON :

7.1 Definition and meaning of Partnership
7.2 Accounts in Partnership
7.3 Admission in Partnership
7.4 Treatment of Goodwill
7.5 Revaluation of Assets and Liabilities
7.6 Illustrations
7.7 Try yourself
7.8 Summary
7.9 Glossary
7.10 Self Assessment Questions

7.1 DEFINITION AND MEANING OF PARTNERSHIP :

According to Section 4 of Indian Partnership Act, Partnership is “the relation between persons
who have agreed to share the profits of a business carried on by all or any of them acting for all”.
The above definition gives the following features to a partnership:
1. It is an association of two or more persons.
2. It has an agreement entered by all the partners concerned.
3. It deals with a business.
4. It can be carried on by all partners or any of them can act for them.
5. The partners share profits and losses as per the agreement.
7.2 ACCOUNTS IN PARTNERSHIP :
Partnership accounts do not present much difficulty unless there is an admission, retirement,
death or dissolution. Profit and Loss Account is prepared in the usual way and the Balance Sheet is also
made out in the usual manner. In this lesson we learn how to prepare accounts when a new partner
enters the organization i.e. admission. The following four lessons deals with other areas of partnership
accounts.
7.3 ADMISSION IN PARTNERSHIP :
It is a usual thing that some new partners join the partnership often which is already in existence
and the firm continues its operations as usual with the old and new partners together. When a new person
is admitted as partner, the two main problems to be tackled are regarding
a) treatment of goodwill and
b) revaluation of assets and liabilities.
Centre For Distance Education 7.2 Acharya Nagarjuna University

7.4 TREATMENT OF GOODWILL :

It is generally observed that a firm, which has been in existence for a number of years, is in a
position to earn a higher amount of profits year after year in comparison to a new firm in spite of all
other things remaining the same. This is because over a period of time a firm establishes its reputation
on account of which not only the old customers continue to patronize the firm but they also bring new
customers. This results in enabling an old established firm to earn excess profits as compared to a new
firm. Goodwill has, therefore, been defined as, “the present value of a firm’s anticipated excess
earnings”.
In the ongoing firm when a new partner is admitted, he automatically enjoys the benefits of the
firm i.e. the goodwill. Therefore, generally the new partner needs to bring some extra amount towards
this goodwill and the existing partners share this in their agreed ratio.

Depending upon the share of profits to be given to the new partner, either a sum of money will
be paid by him to the old partners (through the firm or privately) or the old partners will be credited
with their share of the goodwill. As said earlier, the new partner will take a share of profits which comes
out of the shares of other partners. The old partners must be compensated for such a loss. The amount
to be brought in by the new partner for goodwill is in addition to the amount to be brought in as capital.

The following are the various possibilities as regards goodwill;

1. Premium Method: Under this method, the new partner brings goodwill in cash which is left in the
business or that cash is withdrawn by the old partners. Sometimes, new partner may pay the goodwill
to the old partners privately.

Journal entries:
a) When the new partner brings goodwill in cash which is left in the business —
i) Cash/Bank A/C Dr
To Goodwill
ii) Goodwill A/C Dr
To Old partners Capitals

b) When goodwill brought in by new partner withdrawn by old partners ——

i) Cash/Bank A/C Dr
To Goodwill
ii) Goodwill A/C Dr
To Old partners Capitals iii)
Old partners Capitals A/C Dr
To Cash/Bank
c) When the goodwill is paid by the new partner to the old partners privately, No entry is required.

2. Revaluation Method: The new partners do not bring cash as goodwill but is raised in the books of
the firm. The entry required is as follows:

Goodwill A/C Dr

To Old partners Capitals

 Advance Accounting 7.3 Partnership Accounts I – Admission of a partner

The old partners Capital accounts are to be credited in their old profit sharing ratio. Goodwill
thus created appears in the balance sheet.

3. Memorandum Revaluation Method: Under this method, goodwill is raised in the books and then is
immediately written off. In the above case, goodwill is credited to the old partners in the old profit-
sharing ratio. But when it is to be written off, the goodwill should be credited to all partners in the
new profit sharing ratio.

When a new partner comes into the organization, the existing ratio of the old partners should be
changed to accommodate him. And the partners who are losing their part of the share should get benefit
in the form of goodwill. This is called as sacrificing ratio. For example, A and B, sharing in the ratio
of 3:2 and admit C as partner and it is agreed that the new profit-sharing ratio is 2:2:1. It is obvious that
B does not suffer at all on C’s admission. He previously received 2/5ths of profits; he still receives
2/5ths of profits. It is A alone who has suffered and, therefore, any amount brought in as goodwill by
C should be credited to A only. Thus, it is proper to credit goodwill brought in by a new partner to the
old partners in the ratio in which they suffer on the admission of the new partner.

Goodwill to be inferred: Sometimes, the value of goodwill is not specifically given and has to be
inferred from the arrangement of capital and profit-sharing ratio. Suppose, A’s capital is Rs.5, 000 and
B’s capital is also Rs.5, 000 and they share profits equally. They admit C, as equal partner, on his
bringing in Rs.8, 000 as capital. In this case, the point is that C’s capital should only be one-half of the
combined capitals of A and B. If C’s capital is Rs.8, 000 the combined capitals of A and B should be
Rs.16, 000. Since their present capital is Rs.10, 000, there must be goodwill of Rs.6000 to be shared
equally by A and B.
7.5 REVALUATION OF ASSETS AND LIABILITIES :
When a new partner is admitted, it is natural that he should not benefit any appreciation in the
value of assets which has occurred or vice versa in the value of assets. Similar is the case with liabilities.
Therefore, assets and liabilities are revalued and the old partners are debited or credited with the net
loss or profit, as the case may be, in the ratio in which they have been sharing profits and losses. Partners
may agree that the change in the value of assets and liabilities is to be adopted and figures changed
accordingly or that the assets and liabilities should continue to appear in the books of the firm at the old
figures.
1. When valued are altered in the books: In this case, a profit and loss adjustment account (or revaluation
account0 is opened and the result is to be transferred to the capitals of the old partners in their profit
sharing ratio.

a) For an increase in asset the following entry is required ——

Asset A/c Dr

To P & L Adj. A/C

b) For a reduction in asset——

P & L Adj. A/C Dr

To Asset A/C

c) For increase in liabilities——

Centre For Distance Education 7.4 Acharya Nagarjuna University

P & L Adj. A/C Dr

To Liability

d) For a decrease in liabilities——

Liability A/C Dr

To P & L Adj. A/C

2. When values are not altered in the books: In this case, the increase in the amounts of assets and
liabilities is entered in a Memorandum Adjustment or Revaluation Account but the corresponding entry
is not made in the asset or liability accounts and the balance is transferred to old partners’ capital
accounts in the old ratio. Then, to complete double entry, the entries made in the Memorandum
Adjustment Account are put down on the reverse side and the balance transferred to all partners,
including the new one, in the new profit-sharing ratio.

7.6 ILLUSTRATIONS :

Illustration 1:

R and S are equal partners in a firm. They decided to admit T as a new partner and to readjust
the Balance Sheet values for this purpose. The balance sheet of the firm as at 31 st December, 2007 was
as under.
Creditors 5,000 Machinery 5,000

Bills payable 2,000 Furniture 3,500

Capital: Stock 3,000

R 7,500 Debtors 5,800

S 5,000 12,500 Less: Reserve 300 5,500

Cash 2,500

19,500 19,500
The following adjustments were to be made before T’s admission:

a) Rs.500 more to be provided for bad debts.

b) Furniture is to be valued at Rs.3, 000.

c) Value of machinery is to be appreciated by Rs.1, 000.

d) Investments worth Rs.600 (not included in Balance Sheet) are to be taken into account.

e) T brings Rs.5, 000 for capital and Rs.2, 000 for Goodwill. The amount of Goodwill isshared
by R and S in their due proportions. Give journal entries and prepare the Balance Sheet of the
firm after admission of T as a partner.
 Advance Accounting 7.5 Partnership Accounts I – Admission of a partner

Solution:
Profit and Loss (Adj) A/C Dr 1,000

To Reserve for bad debts 500

To Furniture 500
(Being Assets value reduced)

Machinery A/C Dr 1,000

Investments A/C Dr 600

1,600
To Profit and Loss (Adj) A/C

(Being Assets value raised)

Profit and Loss (Adj) A/C Dr 600

To R’s Capital A/C 300

300
To S’s Capital A/C

(Being profit distributed to partners)

Cash A/C Dr 7,000

To T’s Capital A/C 5,000

2,000
To Goodwill

(Being Capital and Goodwill brought in by T)

Goodwill A/C Dr 2,000

To R’s Capital A/C 1,000

1,000
To S’s Capital A/C

(Being Goodwill distributed between R and S)

Balance Sheet of the New Firm

Liabilities Assets

Creditors 5,000 Furniture 3,000

Bills payable 2,000 Machinery 6,000

Capital: Stock 3,000

Centre For Distance Education 7.6 Acharya Nagarjuna University

R 8,800 Investments 600

S 6,300 Debtors 5,800

T 5,000 20,100 Less: Reserve 800 5,000

Cash 9,500

27,100 27,100

Working Notes:

Profit and Loss Adj. Account

To Reserve for bad debts 500 By Machinery 1,000

To Furniture 500 By Investments 600

To R’s Capital 300

To S’s Capital 300 600

1,600 1,600

Illustration 2 :

Mukund and Makarand were partners in a firm sharing profits equally. Their business position
as on 30th June 2007 was as follows:

Balance Sheet
Liabilities Assets

Sundry Creditors 6,000 Cash in hand 150

Bank overdraft 1,500 Stock 3,600

Mukund capital 2,100 Sundry debtors 6,200

Makarand capital 1,600 Furniture 600

Investments 650

11,200 11,200

It is agreed to take Manohar into partnership and to make the following adjustments:

a) Bad debts to be written off for Rs.1, 600.

b) Value of the furniture to be reduced to Rs.400

c) Depreciate stock at 10%.

 Advance Accounting 7.7 Partnership Accounts I – Admission of a partner

d) Write off 20% on investments.

e) Create goodwill for Rs.1, 000.

Manohar introduced Rs.1, 000 as capital for his 1/3 share. Other partners’ capitals should be
adjusted according to the new partner’s capital.

Pass necessary journal entries and prepare the balance sheet of the new firm.

Solution:
Profit and Loss (Adj) A/C Dr 2,290

To Reserve for bad debts 1,600

To Furniture 200

To Stock 360
To Investments (Being 130
assets value reduced)

Mukund Capital A/C Dr 1,145

Makaran Capital A/C Dr 1,145

To Profit and Loss (Adj) A/C 2,290

(Being profit transferred to capital accounts)

Goodwill A/C Dr 1,000

To Mukund Capital 500

To Makarand Capital 500

(Being goodwill created)

Cash A/C Dr 1,000

To Manohar Capital A/C 1,000

(Being capital brought in by Manohar)

Cash A/C Dr 45

To Makarand Capital 45

(Being the cash brought in)

Centre For Distance Education 7.8 Acharya Nagarjuna University

Mukund Capital A/C Dr 455

To Cash 455

(Being cash paid)

Mukund Capital Account

To Profit & Loss A/C 1,145 By 2,10
Balance 0
B/D
455 By
To Cash
Goodwill 500
To Balance C/D 1,000
2,60
0
To Balance B/D 150 By Mukund’s Capital 455

To Manohar’s Capital 1,000 By Balance C/D 740

To Makarand’s Capital 45

1,195 1,195
To Balance B/D
740

Balance Sheet of the New firm

Liabilities Assets

Creditors 6,000 Cash 740 2,600

1,500 Stock 3,240Makarand Capital
Overdraft Account
Capitals:

Mukund 1,000 Debtors 6,200

Makarand 1,000 Less: R.B.D 1,600 4,600

Manohar 1,000 3,000 Furniture 400

Investments 520

Goodwill 1,000
10,500 10,500

Working notes:
 Advance Accounting 7.9 Partnership Accounts I – Admission of a partner

Profit sharing ratio of old partners: 1:1

New partners share 1/3

Remaining 1-1/3 = 2/3

Mukund’s share 2/3X1/2=1/3

Makaran’s share 2/3X1/2=1/3

To Profit & Loss A/C 1,145 By Balance B/D1,600
1,000 By
To Balance C/D 500
Goodwill
By Cash 45

2,145 2,145

Manohar Capital
Account
1,000
By Cash

Goodwill Account

To Mukund’s Capital 500By balance C/D 1.000

To Makarand’s Capital 500

1,000 1,000
Cash Account
Manohar’s Capital for his 1/3 share = 1,000

Mukund’s Capital for his 1/3 share = 1,000

Makarand’s Capital for his 1/3share = 1,000

Illustration 3:

Anup and Bhupal share profits in the proportion of three-fourths and one-fourths. The Balance
Sheet on December 31, 2006 was as follows:
Sundry creditors 41,500Cash at Bank 22,500

Anup’s Capital 30,000Bills receivable 3,000

Bhupal’s Capital 16,000 Debtors 16,000

Stock 20,000

Fixtures 1,000

Buildings 25,000
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87,000 87,500

On January 1, 2007 Chandrajit was admitted into partnership on the following terms:
a) That Chandrajit pays Rs.10, 000 as his capital for a fifth share.
b) That Chandrajit pays Rs.5, 000 for goodwill half of this sum is to be withdrawn by Anupand
Bhupal.
c) That the capitals of Anup and Bhupal be adjusted on the basis of Chandrajit’s capital by
opening the necessary current accounts.
d) That Stock and Fixtures be reduced by 10% and a 5 % provision be created for
doubtfuldebts on Debtors and Bills receivable.
e) That value of Buildings is appreciated by 20%.
f) That an item of Rs.650 included in creditors is not likely to be claimed and hence should
be written back.
Solution:
Profit and Loss (Adj) Account

To Stock 2,000 By Buildings 5,000

To Fixtures 100 By Creditors 650

To Reserve for bad debts 800

150
To Reserve on Bills

To Anup’s Capital 1,950

To Bhupal’s Capital 650 2,600

5,650
5,650

Anup Capital Account

To Cash 1,875 By Balance B/D 30,000

To Current A/C 3,825 By Profit & Loss A/C 1,950

To Balance C/D 30,000 By Goodwill 3,750

35,700
35,700

Bhupal Capital Account

To Cash 625 By Balance B/D 16,000

To Current A/C 7,275 By Profit & Loss A/C 650

To Balance C/D 10,000 By Goodwill 1,250

 Advance Accounting 7.11 Partnership Accounts I – Admission of a partner

17,900

17,900
Chandrajit Capital Account

10,000
By Cash
Anup Current Account

3,825
By Capital
Bhupal Current Account

7,275
By Capital
Cash Account
To Balance C/D 22,500By Anup Capital 1,875

To Chandrajit capital 10,000By Bhupal Capital 625

To Goodwill 5,000By Balance C/D 35,000

37,500 37,500

Balance Sheet of the firm as on 1-1-2007

Liabilities Assets

Creditors 40,850Cash at Bank 35,000

Capitals: Bills receivable 2,850

Anup 30,000 Debtors 16,000

Bhupal 10,000 Less: RBD 800 15,200

Chandrajit 10,000 50,000Stock 18,000

Current Accounts: Fixtures 900

Anup 3,825 Buildings 30,000

Bhupal 7,275 11,100

1,01,950 1,01,950

Working notes:

Old partners’ profit sharing ratio = ¾: ¼ : 1 share 10,000 Capital

New partner ratio = 1/5 (420) : 3 share 30,000 Capital

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Remaining = 1-1/5 = 4/5

Anup new Ratio = 4/5 x ¾ = 12/20

Bhupal new Ratio = 4/5 x ¼ = 4/20

New profit sharing ratio = 3 (Anup) : 1 (Bhupal) : 1 (Chandrajit)

Illustration 4:

The balance sheet of Sridhar and Muralidhar as on 31st December 2007 is set out below. They
share profits and losses in the ratio of 2:1.
Liabilities Assets

Sridhar’s Capital 40,000Freehold property 20,000

Muralidhar’s Capital 30,000 Furniture 6,000

General Reserve 24,000Stock 12,000

Creditors 16,000 Debtors 60,000

Cash 12,000

1, 10,000 1, 10,000

They agree to admit Purnachandra into the firm subject to the following terms and conditions:

a) Purnachandra will bring in Rs.21, 000 of which Rs.9, 000 will be treated as his share of
goodwill to be retained in the business.

b) He will be entitles 1/4th share of the profits of the firm.

c) Fifty per cent of the general reserve is to remain as a reserve for bad and doubtful debts.

d) Depreciation is to be provided on furniture at 5%.

e) Stock is to be revalued at Rs.10, 500.

Show the journal entries giving effect to the above said arrangements (including cash
transaction) and prepare the opening balance sheet of the new partnership.

Solution:

Profit & Loss (Adj) A/C Dr 1,800

To Furniture 300

To Stock 1,500

(Being assets value reduced)

 Advance Accounting 7.13 Partnership Accounts I – Admission of a partner

Sridhar capital A/C Dr 1,200

Muralidhar capital A/C Dr 600

1,800
To Profit & Loss (Adj) A/C (Being
loss distributed among partners)

General Reserve A/C Dr 12,000

12,000
To Reserve for bad debts (Being
provision created from reserve)

General Reserve A/C Dr 12,000

To Sridhar Capital 8,000

4,000
To Muralidhar Capital

(Being reserve distributed)

Cash A/C Dr 21,000

To Purnachandra Capital 12,000

To Goodwill 9,000
(Being capital and goodwill brought in by Purnachandra)
Goodwill A/C Dr 9,000

To Sridhar Capital 6,000

To Muralidhar Capital 3,000

(Being goodwill distributed)

Balance sheet of the new firm

Liabilities Assets

Capitals: Freehold premises 20,000

Sridhar 52,800 Furniture 5,700

Muralidhar 36,400 Stock 10,500

Purnachandra 12,000 1, 01,200 Debtors 60,000

Creditors 16,000 Less: RBD 12,000 48,000

Cash 33,000
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1, 17,200

1, 17,200 Capital
Working Notes;
Accounts

Sridhar Muralidhar Purna Sridhar Muralidhar Purna

To P & L A/C 1,200 600 —— By Balance 40,000 30,000 —

To Balance C/D 52,800 36,400 12,000 By Cash 12,000

By Gl. Reserve 8,000 4,000

By Goodwill 6,000 3,000

54,000 37,000 12,000 54,000 37,000 12,000

Illustration 5:

On 1st January 2007, A and B who were in partnership sharing 7/12 and 5/12 respectively, take
in C giving him 1/6 share. A and B were to share future profits in the ratio of 13/24 and 7/24.

Over and above his capital, C brings in Rs. 96, 000 as his goodwill for the 1/6 share. The cash
brought in by C as his capital and his goodwill is credited to one separate account in his personal name.
On 31st December 2007, the Trial Balance of the firm stood as follows:
Machinery 6,00,000 A’s Capital 3,36,000

Furniture 40,000 B’s Capital 2,40,000

Stock 1,20,000 C’s Capital 2,24,000

Debtors 2, 00,000 Creditors 48,000

A’s drawings 32,000 Current year’s profit 2,32,000

10, 80,000 10,80,000

Interest on drawings is to be ignored but interest on capital accounts is to be allowed at 5% per

annum after the necessary adjustments therein consequent one’s admission. Prepare the Balance Sheet
of the firm as on December 31, 2007.

Solution:

Working Notes:

Profit sharing ratio of A & B before C’s admission = 7/12 : 5/12

Profit sharing ratio of A & B after C’s admission = 13/24 : 7/24

Sacrificing ratio : A = 7/12- 13/24= 14-13/24 = 1/24

 Advance Accounting 7.15 Partnership Accounts I – Admission of a partner

B = 5/12 – 7/24 = 10-7/24 = 3/24

= 1:3

The goodwill brought in by C (which is kept in an account opened in his personal name) is to
be shared by A and B in their sacrificing ratio i.e. 1:3 respectively. This sharing is to be done
immediately after C’s admission. But it was not done at that time. Therefore, this is to be adjusted
now, with retrospective effect.

1. C’s Personal A/C Dr 2,24,000

To C’s Capital 1,28,000 To A’s Capital 24,000

To B’s Capital 72,000

(Being Rs.96,000 goodwill shared by A and B and the balance transferred to C’s capital)

Profit & Loss A/C for the year 2007

To Interest on Capital
A: 3,60,000 x 5/100 18,000By Balance 2,32,000
B: 3,12,000 x 5/100 15,600
C: 1,28,000 x 5/100 6,400
To Net Profit transferred to

A’s Capital 1,04,000

B’s Capital 56,000

C’s Capital 32,000 1,92,000
2,32,000 2,32,000
A’s Capital Account

To Drawings 32,000 By Balance B/D 3,36,000

To Balance C/D 4,50,000 By C’s personal A/C(goodwill) 24,000
By Interest on capital 18,000 By
P & L A/C (profit) 1,04,000

4,82,000 4,82,000
B’s Account

To Drawings 52,000 By Balance B/D 2,40,000

Centre For Distance Education 7.16 Acharya Nagarjuna University

To Balance C/D
3,31,600 By C’s personal A/C(goodwill) 72,000
By Interest on capital 15,600
By P & L A/C (profit) 56,000
3,83,000 3,83,000
C’s Capital Account

To Drawings 8,000 By C’s personal A/C (goodwill) 1,28,000

To Balance C/D 1,58,000 By Interest on capital 6,400
By P & L A/C (profit) 32,000
1,66,400 1,66,400
Balance Sheet of A, B and C as on 31-12-2007

Capital A 4,50,000 Machinery 6,00,000

Capital B 3,31,000 Furniture 40,000
Capital C 1,58,400 Stock 1,20,000
Creditors 48,000 Cash 28,000

9,88,000 9,88,000
Note:

1. Interest on capital in to be allowed on the amount which is remained after adjusting the goodwill
into the capital accounts.
2. The sacrificing ratio is to be taken into account, when the goodwill is brought in by new partner
in cash and also when the old ratio and new ratio is given.
Illustration 6:

A and B were partners in AB Coal Stores sharing profits equally. On 31 st December, 2007,
their balance sheet was as follows:
Liabilities Assets

Creditors 7,480 Furniture and fittings 1,200

Bills payable 8,520 Lorries 9,300

Capitals: Horses and Carts 4,760

A 30,000 Debtors 35,000

B 26,000 56,000 Stock of Coal 7,700

Cash at Bank 13,660

Cash in hand 180

72,000 72,000
 Advance Accounting 7.17 Partnership Accounts I – Admission of a partner

On the above date they admitted C as new partner with the following adjustments:

1. A, B and C share future profits in 3:2:1 ratio.

2. As Capital C is bringing Rs.5, 600 debtors (provide 5% reserve), Rs.3, 000 goodwill and the
remaining in cash. C’s capital being Rs.10, 000.

3. The following adjustments were made in A and B balance sheet:

a) Lorries value to be raised to Rs.10, 000.

b) Provide reserve on debtors at 71/2%.

c) Create goodwill for Rs.4, 450.

4. A’s Capital should be equal to that of B.

Pass the necessary journal entries for the above adjustments and prepare cash account, capital
accounts and the new balance sheet.

Solution:

Lorries A/C Dr 700

To P & L A/C 700

(Being the asset value appreciated)

P & L Adj A/C Dr 2,640

To Reserve for bad debts A/C 2,640

(Being the reserve provided on debtors)

A’s Capital A/C Dr 970

B’s Capital A/C Dr 970

1,940
To P & L Adj. A/C

(Being the loss shared to partners)

Goodwill A/C Dr 4,450

To A’s Capital 2,225

2,225
To B’s Capital (Being
goodwill created)

Debtors A/C Dr 5,600

Centre For Distance Education 7.18 Acharya Nagarjuna University

Goodwill A/C Dr 3,000

Cash A/C (Balancing figure) Dr 1,680

To C’s Capital A/C 10,000

To Reserve for doubtful debts 280

(Being the new partner brings various assets towards capital)

A’s Capital A/C Dr 4,000

To Cash A/C 4,000

(Being the excess capital paid to partner)

P & L Adj. Account

To Reserve for bad debts 2,640 By Lorries 700

By A’s Capital 970

By B’s Capital 970

2,640
2,640 A’s
Capital Account

To P & L Adj. A/C 970 By Balance 30,000

To Cash A/C 4,000 By Goodwill 2,225

To Balance C/D 27,225

32,225
32,225 B’s
Capital Account

To P & L Adj. A/C 970 By Balance 26,000

To Balance C/D 27,255 By Goodwill 2,225

28,225
28,225 C’s
Capital Account

10,000
By Sundries

Cash Account

To Balance: Bank 13,660By A’s Capital 4,000

Cash 180By Balance C/D 11,520

 Advance Accounting 7.19 Partnership Accounts I – Admission of a partner

To C’s Capital 1,680

15,520 15,520
Balance Sheet of A, B and C on 31-12-2007
Liabilities Assets
Capital A 27,255Furniture 1,200
Capital B 27,255 Lorries (9,300+700) 10,000
Capital C 10,000Horses and Carts 4,760
Creditors 7,480 Debtors 35,200
Bills payable 8,520 5,600
40,800
Less: RBD 2,920 37,880
(2,640+280)
Coal Stock 7,700
Goodwill 7,450
Cash 11,520
80,510 80,510
Illustration 7:
The following was the balance sheet of A, B and C who were equal partners, on 1 st June 2007.
Liabilities Assets
Bills payable 3,300 Cash 600
Creditors 6,000 Debtors 10,800
Capital Accounts: Stock 11,400
A 16,800 Furniture 2,400
B 12,600 Building 19,500
C 6,000 35,400
44,700 44,700
They decided to take D into partnership and give him a fourth share in the profits on the
following terms:

1. That D should bring in Rs.9, 000 for goodwill and Rs.15,000 as capital.
2. That one-half of the goodwill shall be withdrawn by the old partners.
3. That stock and furniture be depreciated by 10 per cent.
4. That a provision of 5 per cent on debtors be created for doubtful debts.
5. That a liability for Rs.1, 050 be created against hills discounted.
6. That the value of the building having appreciated, the building should be valued of Rs.27,000.
7. That the values of liabilities and assets other than cash are not being altered.
Prepare the necessary ledger accounts and the opening balance sheet of the firm as newly
constituted.
Centre For Distance Education 7.20 Acharya Nagarjuna University

Solution:
Working Notes;
Here in this problem, first the Assets and Liabilities were revalued and again after D’s
admission, it was asked no to alter the values of Assets and Liabilities. For this purpose, a separate
account called “Memorandum P & L A/C” is to be prepared.
Memorandum P & L Adj. Account
To Stock 1,140 By Buildings 7,500
To Furniture 240
To Reserve for bad debts 540 To
Liability on bills discounted 1,080 To
Capital A/Cs (profit):
A 1,500 B
1,500
C 1,500 4,500
7,500 7,500
By Sundry Assets (debited to this
Account previously) 3,000 To Buildings
7,500 By Capital Accounts (Less)
A 1,125
B 1,125
C 1,125 4,500
7,500 7,500
Goodwill Account
To A’s Capital 3,000 By Cash 9,000
To B’s Capital 3,000
To C’s Capital 3,000
9,000 9,000

A’s Capital Account

To Cash 1,500 By Balance 16,800
To P & L Adj. A/C 1,125 By P & L Adj. A/C 1,500
To Balance C/D 18,675 By Goodwill 3,000
21,300 21,300
By Balance B/D 18,675
B’s Capital Account
To Cash 1,500 By Balance 12,600
To P & L Adj. A/C 1,125 By P & L Adj. A/C 1,500
To Balance C/D 14,475 By Goodwill 3,000
 Advance Accounting 7.21 Partnership Accounts I – Admission of a partner

17,100 17,100
By balance B/D 14,475
C’s Capital Account
To Cash 1,500 By Balance 6,000
To P & L Adj. A/C 1,125 By P & L Adj. A/C 1,500
To Balance C/D 7,875 By Goodwill 3,000
10,500 10,500
By Balance B/D 7,875
D’s Capital Account
To P & L Adj. A/C 1,125 By Cash 15,000
To Balance C/D 13,875
15,000 15,000
By Balance B/D 13,875
Cash Account
To Balance 600By Capital A/C:
To D’s Capital 15,000 A 1,500
To Goodwill 9,000 B 1,500
C 1,500
By Balance C/D 20,100
24,600 24,600
To Balance B/D 20,100
Balance Sheet of A, B, C and D as on 1st June, 2007
Liabilities Assets
Bills payable 3,300 Cash 20,100 Creditors 6,000 Debtors 10,800
Capitals: Stock 11,400
A 18,675 Furniture 2,400 B 14,475 Buildings 19,500
C 7,875
D 13,875
64,200 64,200
Illustration 8:

Sudha and Aruna are partners in a firm sharing profits in the ratio of 2:1. The Balance Sheet of
the firm on 31st December, 2007 was as follows:
Liabilities Assets

Creditors 4,200 Bank 3,012

Investments provision 1,200 Bills receivable 7,500

Centre For Distance Education 7.22 Acharya Nagarjuna University

Workmen compensation fund 3,600 Debtors 12,000

General reserve 6,300 Less: Provision 1,500 10,500

Capitals: Stock 9,000

Sudha 18,000 Investments 15,000

Aruna 14,700
32,700 Goodwill 2,988

48,000 48,000
On this date Prathima is admitted for 2/5th share in the profits of the firm. Following
revaluations were made at the time of admission:

1. Accrued incomes not appearing in the books Rs.300

2. Market value of investments is Rs.13, 500.

3. Claim on account of compensation is estimated at Rs.450.

4. Provision for doubtful debts is required at Rs.1800.

5. X, an old customer, whose account was written off as bad, has promised to pay Rs.1, 050 in
settlement of his full claim.

6. Sudha and Aruna have purchased machinery on hire-purchase system for Rs.9, 000 of which
only Rs.300 are to be paid. Both machinery and unpaid liability did not appear in the Balance
Sheet.

7. There was a Joint Life Policy on the lives of Sudha and Aruna for Rs.45, 000. Surrender value
of the policy on the date of admission amounted Rs.7, 200. It was decided to record this as an
asset of the new firm.

8. Prathima is required to bring in Rs.30, 000 as capital. Her share of Goodwill was calculated at
Rs.7, 200.

You are required to make journal entries and prepare new Balance Sheet after the admission of Prathima.

Solution:

Accrued income A/C Dr 300

Workmen compensation fund A/C Dr 3,150
X’s A/C(old customer) Dr 1,050
Machinery A/C Dr 9,000
Joint Life Policy A/C Dr 7,200
To P & L Adj. A/C 20,700
(Being assets and liabilities revalued)
P & L Adj. A/C Dr 900
 Advance Accounting 7.23 Partnership Accounts I – Admission of a partner

To Investment Provision A/C 300

To Reserve for doubtful debts 300
To Hire vendor (Machinery) A/C 300
(Being assets and liabilities revalued)
P & L Adj. A/C Dr 19,800
To Sudha Capital A/C 13,200
To Aruna Capital A/C 6,600
(Being the profit on revaluation shared between partners)
General Reserve A/C Dr 6,300
To Sudha Capital A/C 4,200
To Aruna Capital A/C 2,100
(Being the accumulated profit shared to partners)
Goodwill A/C Dr 15,012
To Sudha Capital 10,008

To Aruna Capital 5,004

(Being the goodwill created)

Full value of goodwill 5/2 x 7,200 =18,000

Less: Already appearing 2,988
15,012
Cash A/C Dr 30,000
To Prathima’s Capital A/C 30,000
(Being the new partner brings capital)
Balance Sheet of Sudha, Aruna and Prathima
Liabilities Assets
Creditors (including hire vendor) 4,500 Cash (3,012 + 30,000) 33,012
Investment provision 1,500 Bills receivable 7,500
Workmen’s compensation fund 450 Debtors 12,000

Capitals: X 1,050
Sudha 45,408 13,050
Aruna 28,404 Less: Provision 1,800 11,250
Prathima 30,000 Stock 9,000
Investments 15,000
Joint life policy 7,200
Machinery 9,000
Goodwill 18,000
Centre For Distance Education 7.24 Acharya Nagarjuna University

Accrued incomes 300

1, 10,262 Capital 1, 10,262
Accounts

Sudha Aruna Sudha Aruna

By Balance 18,000 14,700
By P & L Adj. A/C 13,200 6,600
By General reserve 4,200 2,100
To Balance C/D 45,408 28,404By Goodwill 10,008 5,004
45,408 28,404 45,408 28,404
Profit & Loss Adj. Account
To Sundry Assets & Liabilities 900 By Sundry Assets & Liabilities 20,700 To Capital
Accounts:
Sudha 13,200
Aruna 6,600
20,700 20,700
Note: Liability as compensation fund is only Rs.450; the balance will be accumulated profit, to be shared
by the partners.

7.7 TRY YOURSELF:

1. Sunil, Kapil and Rakesh trading in partnership and sharing profits and losses in the proportion of ½,
1/3 and 1/6 respectively agree to take Ajay into the partnership on the following terms;
a) Ajay should be given ¼ share and he should bring Rs.10, 000 as goodwill and Rs.1, 28,000 as capital.
b) A reserve for bad and doubtful debts should be created at 5%.
c) The value of Land and Building should be brought up to Rs.6, 20,000.
d) Stock should be taken at Rs.2, 61,000.
e) Machinery should be revalued at Rs.61, 600.
The following is the Balance Sheet of the firm of Sunil, Kapil and Rakesh on the eve of Ajay’s
admission.
Balance Sheet as on 31-12-2007
Sundry Creditors 38,000 Cash on hand 8,000
Partners’ Capitals: Debtors 2, 52,000
Sunil 5, 70,000 Stock 2, 90,000
Kapil 3, 20,000 Machinery 70,000
Rakesh 1, 60,000 10, 50,000 Land and Buildings 4 80,000
Reserve fund 12,000
11, 00,000 11, 00,000
 Advance Accounting 7.25 Partnership Accounts I – Admission of a partner

The capitals of the old partners who continue to share in the same proportion in the new firm
as before should be adjusted on the basis of the proportion of Ajay’s capital to his share in the business,
involving cash movements in or out, as the case may be.

Pass journal entries in the books of the new firm, keeping these arrangements in view and show
the balance sheet of the newly constituted firm.

(Capital Accounts: Sunil- 1,92,000; Kapil – Rs.1,28,000; Rakesh – Rs.64,000; Ajay – Rs.1,28,000;
Balance Sheet total – Rs.13,28,000)

2. A and B are partners in a firm sharing profits and losses as 5:3. The position of the firm as
on31st March 2007 is as follows:
Capital and Liabilities Property and Assets
Capital Accounts: Plant and Machinery 40,000
A 30,000 Stock 30,000
B 20,000 50,000Sundry Debtors 20,000
Sundry Creditors 15,000Bills receivable 10,000
Bank overdraft 42,500Cash at bank 7,500
1, 07,500 1,07,500
C now joins them on condition that he will share 3/4th of the future profits, the balance of profits
being shared by A and B as 5:3. He introduces Rs.40, 000 by way of capital in cash and pays off the
overdraft. He also pays Rs.4, 000 by way of premium for goodwill of the business and this amount is
to remain in business. The partners agree to depreciate plant by 10% and raise a reserve against Sundry
Debtors by 5%.

You are asked to journalise the entries in the books of the firm and the resultant Balance Sheet.
How will the partners share future profits?

(Capitals: A – Rs.29,375; B – Rs.19,625; C – Rs.82,500; Balance Sheet total Rs.1,46,500)

3. Shriram and Krishna are partners in a firm sharing profits and losses as Shriram 75% and
Krishna 25% on 1st January, 2007; their position was as given below:
Liabilities Assets
Capital Accounts; Plant 40,000
Shriram 50,000 Stock 10,000
Krishna 30,000 80,000 Debtors 30,000
Sundry Creditors 20,000 Cash at bank 20,000
1,00,000 1,00,000
Nair is now to join the partnership. He agrees to pay the partners Rs.20,000 by way of goodwill
and introduce one half of the combined capital of the two existing partners after depreciating plant and
stock at 20% and 10% respectively and raising a reserve of 10% against Sundry Debtors. The new
partner is to be allowed 1/4th share of the profits of the firm.

You are asked to record the above transactions in the books of the firm and give the resultant
Balance Sheet of the new firm.
Centre For Distance Education 7.26 Acharya Nagarjuna University

(New Capitals: Shriram – Rs.56, 000; Krishan – Rs.32,000; Nair – Rs.44,000; Total of Balance Sheet –
Rs. 1,52,000)

4. The following is the Balance Sheet of Srinivas and Chandrasekhar as on 31 st March 2007.
Narayana is admitted as partner on that date when the position of Srinivas and Chandrasekhar was as
under:
Liabilities Assets
Srinivas’s Capital 3,000 Debtors 3,300
Chandrasekhar’s Capital 2,400 Land and Buildings 2,400
Creditors 3,600 Plant and Machinery 3,000
General Reserve 4,800 Stock 3,600
Workmen’s compensation fund 1,200 Cash and Bank Balances 2,700
15,000 15,000
Srinivas and Chandrasekhar shared profits in the proportion of 3:2. The following terms of
admission are agreed upon:

1. Revaluation of assets: Land and Buildings Rs.5, 400, Stock Rs.4, 800.
2. The liability on workmen’s compensation fund is determined at Rs.600.
3. The new partner has to bring in as his share of goodwill Rs.3,000 in cash.
4. The new partner was to bring further cash as would make his capital equal to 20% of the
combined capitals of partners Srinivas and Chandrasekhar after above revaluation and
adjustments are carried out.
5. The future profit sharing proportions were as under: Srinivas – 2/5th; Chandrasekhar -2/ 5th;
Narayana – 1/5th. Prepare the new Balance Sheet of the firm and the capital accounts of the
partners.
(New Capitals: Srinivas- Rs.11, 760; Chandrasekhar –Rs.6, 240; Narayana – Rs.3, 600;
Total Balance Sheet – Rs.25, 800)
5. X, Y and Z were partners sharing Profits and Losses in the ratio of 3:2:1. On January 1 st, 2007,
they admitted A into partnership on the following terms:

Goodwill of the firm was valued at Rs.2, 70,000; A paid Rs.45, 000 to X, through the books,
on account of goodwill. A paid in proportionate of capital. It was further agreed that investments are
to be revalued at Rs.54, 000; plant should be reduced to Rs.87, 000. A sum of Rs.9, 000 included in
creditors was to be written back as there was no viability to pay the amount. The Balance Sheet before
A’s admission was as follows:

Liabilities Assets
Creditors 2, 70,000 Cash at bank 1, 20,000
Capitals; Debtors 1, 80,000
X 1, 80,000 Stock 1, 50,000
Y 1, 20,000 Investments at cost 90,000

Z 60,000 Furniture and Fittings 30,000

 Advance Accounting 7.27 Partnership Accounts I – Admission of a partner

Reserve 45,000 Plant 1, 05,000

6, 75,000 6, 75,000
The Profits for 2007 were Rs.1, 80,000 and drawings were Rs.45, 000 for X, Rs.36, 000 for Y,
Rs.22, 500 for Z and Rs.18, 000 for A.

Journalise the entries to be made on A’s admission, give the capital accounts and the resulting
Balance Sheet.

(Current Accounts: X – Rs.15, 000; Y – Rs.24, 000; Z – Rs.7, 500; A – Rs.12, 000; balance sheet
– Rs.6, 79,500)

7.8 SUMMARY :
Partnership is a business carried on by one partner for all and all working together to share
profits and bear losses. New partners may join the ongoing partnership which is called as admission of
partnership. When a new partner admits into the firm, normally, he brings with him the capital and an
agreed amount of goodwill. There are various ways of preparing accounts depending on different
circumstances. Normally, in admission, a profit and loss adjustment account and a new balance sheet
is to be prepared after adjusting the old partners capital accounts.

7.9 GLOSSARY :
Partnership : It is the relation between persons who have agreed to share the profits of the business
carried on by all or any of them acting for all.
Goodwill : It is the present value of a firm’s anticipated excess earnings.

7.10 SELF ASSESSMENT QUESTIONS :

1. Define partnership. What are the things to be remembered when a new partner comes in?

2. What is goodwill? How it is valued in case of admission of a new partner?

Dr.R.Jayaprakash Reddy.
 LESSON - 8
PARTNERSHIP ACCOUNTS II – RETIREMENT OR EATH OF
A PARTNER
OBJECTIVES :
After going through this lesson you will be able to understand the following:
1. Treatment of goodwill and revaluation of assets and liabilities in case of retirement or
death of a partner.
2. Purchase of retiring partner’s share by the remaining partners.
3. Treatment of Joint Life policy.

STRUCTURE OF THE LESSON :

8.1 Retirement of a partner
8.1.1 Goodwill
8.1.2 Revaluation of Assets and Liabilities
8.1.3 Payment to Retiring Partner
8.1.4 Purchase of Retiring partner’s share
8.2 Death of a Partner
8.3 Joint Life policy
8.4 Illustrations
8.5 Try yourself
8.6 Summary
8.7 Glossary
8.8 Self- Assessment Questions

8.1 RETIREMENT OF A PARTNER :

In the partnership, any of the partners may retire in accordance with agreement, or with the
consent of the remaining partners or where the partnership is at will, by giving notice in writingto all
other partners of his intention to retire. A retiring partner will not be liable for liabilities incurred by
the firm after his retirement. However, he must give a public notice to that effect. Such a public
notice is not necessary in case of a sleeping or dormant partner.
The problems to be dealt with on retirement of a partner are mainly similar to those arising
on the admission of a partner. The main difference between admission of a partner and retirementof a
partner is on the question of payment of the dues to the retiring partner. Treatment of goodwill and
revaluation of assets and liabilities in retirement are as follows:

8.1.1 Goodwill :
Goodwill will be valued in the manner prescribed in the deed or by mutual understanding.
One of the following cases may be adopted:

1. Goodwill may be raised in the books of the firm. Then the following entry is required.
Centre For Distance Education 8.2 Acharya Nagarjuna University

Goodwill A/C Dr
To Partners’ A/Cs (to all partners in the old profit sharing ratio)
2. Goodwill may be raised in the books of the firm and is written off. The following entries
arerequired:
a) Goodwill A/C Dr
To Partners’ A/Cs (to all partners in the old profit sharing ratio)

b) Partners’ Capital A/Cs (Remaining partners and in the new profit sharing ratio) Dr
To Goodwill
3. Only the share of the retiring partner is brought into books. The entry is
Goodwill A/C Dr
To Retiring partner Capital A/c (his share level)
In this case, it is advisable to write off the goodwill to the remaining partners in the ratio in
which they gain on the retirement. If goodwill appears in the books already, entries for raising
goodwill should be made only for the difference.
8.1.2 Revaluation of Assets and Liabilities :
The method of dealing with revaluation of assets is exactly similar to that followed at the
time of admission of a partner. The Profit and Loss Adjustment Account or Revaluation Account
will be prepared and the balance transferred to all the partners, including the retiring one, in the old
profit-sharing ratio. Assets and liabilities will then appear in the books at changed values. Butif it is
desired that assets and liabilities should continue to appear in the books at the old values, a
Memorandum Revaluation Account will be prepared. Its balance will be transferred to all the
partners in the old profit-sharing ratio and then the same amount will be put on the reverse side and
transferred to the remaining partners in the new profit-sharing ratio.

8.1.3 Payment to Retiring Partner:

The amount due to the retiring partner will be paid as per terms of the partnership agreement or
as otherwise mutually agreed. When the amount payable to the retiring partner is determined, it will
be transferred to his loan account.
Then the journal entry will be:
Retiring Partner’s Capital A/C DrTo Retiring Partner’s Loan A/C
In case the continuing partners agree to bring cash to pay off the retiring partner, the
entries will be:
Bank A/C Dr
To Continuing Partners’ Capitals A/Cs
(Being cash brought in by the partners in the agreed ratio to pay off the retiring partner)
Retiring Partner’s Capital A/C Dr
To Bank
(Being cash paid to the retiring partner)
In case the continuing partners decide to pay the retiring partner in their individual capacity
in their profit - sharing ratio, the entry will be:
Retiring Partner’s Capital Loan A/C Dr
To Continuing Partners’ Capital A/Cs
The amount due to the retiring partner may be agreed to be paid in installments withinterest.
 Advanced Accounting 8.3 Partnership Accounts II – Retirement or
death of a partner

In such case Loan account will be closed after the last installment is paid.
8.1.4 Purchase of retiring partner’s share :
There may, sometimes, be an agreement that the retiring partner’s share in the firm will be
purchased by the remaining partners. If the agreement does not state the proportion in which the
remaining partners will buy the share of the retiring partner, it will be in the profit-sharing ratio. In
the case of purchase, the amount due to the retiring partner is ascertained in the usual manner and
then the retiring partner’s capital account is debited and the other partners’ capital accountscredited
in the profit-sharing ratio or the ratio agreed upon. The retiring partner’s loan will not figure in the
books of the firm and he will look to the partners in their individual capacities for the satisfaction
of his claim.
8.2 DEATH OF A PARTNER :
In the event of death of a partner, usually, the surviving partners carry on the business,
purchasing the share of the deceased partner after determining the amount due to him and then
treating it as a loan to the firm. The legal representatives or the executor of the deceased partnerwill
be entitled to get from the firm the amounts due. It is ascertained adding deceased persons capital,
share of goodwill, profit on revaluation and share out of the proceeds of a joint life insurancepolicy.
Except this, the treatment in accounts is not different from that in case of retirement. After
ascertaining the amount due to the deceased partner, the balance in his capital account should be
transferred to an account opened in the name of his executor.
It should be noted that according to the Partnership Act, the executors would be entitled, at
their choice, to interest at 6% p.a. on the amount due from the date of death to the date of payment
or to that portion of profit which is earned by the firm with the help of the amount due tothe deceased
partner. This also applies to a retiring partner.

8.3 JOINT LIFE POLICY :

For funds to pay to the executor of a deceased partner, without upsetting the working capital
of the firm, it is usual to take out a joint policy on the lives of the partners. The insurance company
undertakes to pay a fixed sum of money when any of the partners dies. There are threeways to deal
with this in the accounts:
1. All the premiums paid are treated as expenses and debited to Profit and Loss Account and,
when a partner dies, the amount received from the insurance company is treated as
a profit and credited to all partners in the profit-sharing ratio.
2. The premiums paid are debited to the Joint Life Policy account.
a) Every year, an amount equal to the premium is debited to the Profit and Loss
Account and credited to Joint Life Policy Reserve account.
b) The Joint Life Policy account and Joint Life Policy Reserve account are mutually
adjusted so as to leave a balance in each account equal to the surrender value of the
policy.
c) When death occurs of a partner, the amount received is credited to the Joint Life
Policy account. The amount standing to the credit of the Joint Life Policy Reserve
account is also transferred to it and then it is closed by transfer to the capital
accounts of all partners.
3. The surrender value of the policy is considered as an asset and the excess of the amount
paid over the surrender value as an expense. In this case, the premiums paid aredebited
 Centre For Distance Education 8.4 Acharya Nagarjuna University

to a Joint Life Policy account which is reduced to its surrender value by appropriate debit
to the Profit and Loss account. The Joint Life Policy Account is an asset and will be shown
in the Balance Sheet. When a partner dies, the amount received from the insurance
company will be credited to the joint life Policy Account,the balance on this account being
then transferred to the capital accounts of partners(including the deceased partner) in the
profit-sharing ratio.
8.4 ILLUSTRATIONS :
Illustration 1 :
A, B and C are partners, sharing profits equally. Their Balance Sheet at 31st December
2007 is as follows;
Liabilities Assets
Sundry Creditors 4,000 Cash at Bank 4,000
Capitals: Bills receivable 3,000
A 12,000 Sundry debtors 20,000
B 8,000 Less: RBD 1,000 19,000
C 7,500 Stock 18,000
Reserve 6,000 Fixtures 3,500
47,500 47,500
B retires on the date and the following adjustments are to be made for the purpose:
a) Goodwill of the firm is valued at Rs.12, 000.
b) Fixtures to be depreciated by 5%.
c) Stock to be appreciated by 10%.
d) Reserve for bad debts to be increased by Rs.500.
Draw up the Profit and Loss Adjustment Account, Capital Accounts of the partners and the
Opening Balance Sheet of the continuing partners.
Solution :
Profit and Loss Adj. Account

To Fixtures 175 By Stock account 1,800

To Reserve for bad debts 500
To A’s Capital 375
To B’s Capital 375
To C’s Capital 375 1,125
1,800 1,800

Goodwill Account
To A’s Capital 4,000 By Balance C/D 12,000
To B’s Capital 4,000
To C’s Capital 4,000
12,000 12,000
 Advanced Accounting 8.5 Partnership Accounts II – Retirement or
death of a partner

To Balance B/D 12,000

Reserve Account
To A’s Capital 2,000 By Balance B/D 6,000
To B’s Capital 2,000
To C’s Capital 2,000
6,000 6,000

A’s Capital Account

To Balance C/D 18,375 By Balance B/D 12,000
By P & L Adj. A/C 375
By Goodwill 4,000
By Reserve 2,000
18,375 18,375
By Balance B/D 18,375
B’s Capital Account
To Loan A/C 24,375 By Balance B/D 18,000
By P & L Adj. A/C 375
By Goodwill 4,000
By Reserve 2,000
24,375 24,375

C’s Capital Account

To Balance C/D 13,875 By Balance B/D 7,500
By P & L Adj. A/C 375
By Goodwill 4,000
By Reserve 2,000
13,875 13,875
By Balance B/D 13,875

B’s Loan Account

By Capital A/C23,475

Balance Sheet of A and C as on 31-12-2007

Liabilities Assets
Creditors 4,000 Cash 4,000
Capitals: Bills receivable 3,000
A 18,375 Debtors 20,000
C 13,875 Less: RBD 1,500 18,500
Centre For Distance Education 8.6 Acharya Nagarjuna University

B’s Loan Account 24,375 Stock (18,000+1,800) 19,800

Fixtures 3,325
Goodwill 12,000
60,625 60,625
Illustration 2 :
Viswanath, Gavaskar and Sobers are in partnership sharing profits equally. Sobers retiredon
31 March 2007. The Balance Sheet of the firm on 31st December 2006 stood as follows:
st

Balance Sheet
Liabilities Assets
Creditors 7,740 Cash in hand and bank 3,000
General Reserve 2,400 Debtors 6,000
Investment fluctuation 720 Stock 6,000
Reserve for doubtful debts 480 Investments (at cost) 3,000
Capitals: Freehold property 24,000
Viswanath 18,000 Goodwill 11,340
Gavaskar 12,000
Sobers 12,000 42,000
53,340 53,340
On the date of retirement it was found that: a) Freehold property e valued at Rs.34, 800.b)
Investments be valued at Rs.2, 820. c) Debtors were all good. d) Stock is valued at Rs.5, 640. e)
Goodwill is valued at on year’s purchase of the average profit of the past five years. f) Sobers share
of profit to the date of retirement be calculated on the basis of average profit of the precedingthree
years.
The books showed the profits of the last five years as follows: 2002 – Rs.6, 900; 2003 –
Rs.8, 400; 2004 – Rs.5, 400; 2005 – Rs.4, 800; 2006 – Rs.6000.
You are required to pass journal entries, give capital account of Sobers, and prepare Balance
Sheet of the remaining partners.
Solution :
Calculation of Goodwill :
Total profit of 5 years: 6,900+8,400+5,400+4,800+6,000=31,500
One year’s average goodwill = 31,500/5 = 6,300
Goodwill already appearing in Balance Sheet =
11,340Less: Revalued amount 6,300
Decrease in the value of Goodwill 5,040
Sobers’s share of profit to the date of
retirement:Date of Balance Sheet 31
December 2006
Date of retirement 31 March 2007 i.e. after 3 months.
Total of the preceding 3 years profit = 5,400+4,800+6,000 =
16,200Average = 16,800/3 = 5,400
 Advanced Accounting 8.7 Partnership Accounts II – Retirement or
death of a partner

Profit for 3 months = 5,400/12x3 =

1,350Sobers’s share = 1,350x 1/3 =
450 Journal entries;
1. P & L Adj. A/C Dr 5,400
To Stock 360
To Goodwill 5,040
(Being the assets revalued)
2. Freehold Property A/C Dr 10,800
RBD A/C Dr 480
Investment fluctuation fund A/C Dr 540
To P & L Adj. A/C 11,820
(Being two assets revalued)

3. P & L Adj. A/C Dr 6,420

To Viswanath’s Capital 2,140
To Gavaskar’s Capital 2,140
To Sobers’s Capital 2,140
(Being the profit on revaluation distributed among the partners)
4. General Reserve A/C Dr 2,400
To Viswanath’s Capital 800
To Gavaskar’s Capital 800
To Sobers’s Capital 800
(Being the accumulated profit distributed to the partners)
5. P & L Suspense A/C Dr 450
To Sobers’s Capital 450
(Being the share of profit to the date of retirement (3 months)
Credited to partner)
6. Sobers’s Capital A/C Dr 15,390
To Sobers’s Loan A/C 15,390

(Being the retiring partner’s claim transferred to the loan account)

Sobers’s Capital Account
To Loan A/C 15,390 By Balance 12,000

By P & L Adj. A/C 2,140

By General Reserve 800

By P & L Suspense A/C 450

(3 months profit)
Centre For Distance Education 8.8 Acharya Nagarjuna University

15,390 15,390

Balance Sheet of Viswanath and Gavaskar as on 31-3-2007

Liabilities Assets

Capitals: Cash 3,000

Viswanath 20,940 Debtors 6,000

Gavaskar 14,940 Stock 5,640

Sobers Loan A/C 15,390 Investments 3,000

Creditors 7,740 Freehold Property 34,800

Investment fluctuation fund 180 Goodwill 6,300

P & L Suspense A/C 450

59,190 59,190

Working notes:

Profit and Loss Adjustment Account

To Sundry Assets 5,400 By Sundry Assets 11,820

To Capital Accounts:
 Advanced Accounting 8.9 Partnership Accounts II – Retirement or
death of a partner

Note :
Viswanath 2,140
Gavaskar 2,140
Sobers 2,140 6,420
11,820 11,820
Capital Account
Viswanath Gavaskar Viswanath Gavaskar
By balance 18,000 12,000 P
& L Adj. A/C 2,140 2,140
General Reserve 800 800
20,740 20,740

As the Goodwill is already appearing in the Balance Sheet, no special treatment for Goodwill
is necessary. It is enough to adjust in the P & L Adj. A/C, along with other assets.
Investments: Actual value as per Balance Sheet = 5,000
Less: Existing fund 1,200
Value as per Balance Sheet 3,800
i.e. there is an appreciation in the value by Rs.900. This appreciation is shown in another way by
reducing the investment fluctuation fund.

Illustration 3 :
P, Q and R are partners, sharing profits equally. Balance Sheet at 31st December 2007 isas
follows:
Liabilities Assets
Sundry Creditors 5,000 Cash at Bank 3,000
Current Accounts; R’s Current A/C 2,500
P 2,000 Bills receivable 5,000
Q 3,000 Sundry debtors 20,000
Reserve Capitals: Less: RBD 1,000 19,000

P 10,000 Stock 18,000

Q 15,000 Fixture 3,500
R 10,000
51,000 51,000
R retires on that date and the following adjustments are to be made for the purpose:
1. Goodwill is valued at Rs.12,000.
2. Fixtures to be depreciated by 5%.
3. Stock to be appreciated by 10%.
4. Bad debts provision to be increased by Rs.500.
Find out the amount due to R and transfer it to his loan account. Pass journal entries, open
Centre For Distance Education 8.10 Acharya Nagarjuna University

partners account and Profit and Loss Adjustment Account, and prepare the opening BalanceSheet of
the continuing partners.
Solution :
Journal entries :
1. P & L Adj. A/C Dr 675
To Fixtures 175
To Reserve for bad debts 600

(Being Assets value reduced)

2. Stock A/C Dr 1,800
To P & L Adj.A/C 1,800
(Being Asset value rose)

3. P & L Adj. A/C Dr 1,125

To P’s Current A/C 375
To Q’s Current A/C 375
To R’s Current A/C 375
(Being profit transferred to current accounts)
4. Goodwill A/C Dr 12,000
To P’s Current A/C 4,000
To Q’s Current A/C 4,000
To R’s Current A/C 4,000

(Being Goodwill created)

5. Reserve A/C Dr 6,000
To P’s Current A/C 2,000
To Q’s Current A/C 2,000
To R’s Current A/C 2,000
(Being Reserve distributed)
6. R’s Current A/C Dr 3,875
To R’s Capital A/C 3,875

(Being current account balance transferred to Capital Account)

7. R’s Capital A/C Dr 13,875
To R’s Loan A/C 13,875
(Being Capital account balance transferred to Loan account)
Profit and Loss Adjustment Account
To Fixtures 175 By Stock 1,800
To Reserve for bad debts 500
To P’s Current A/C 375
To Q’s Current A/C 375
To R’s Current A/C 375
1,800 1,800
 Advanced Accounting 8.11 Partnership Accounts II – Retirement or
death of a partner

Goodwill Account
To P’s Current A/C 4,000
To Q’s Current A/C 4,000
To R’s Current A/C 4,000
12,000

P’s Current Account

To Balance C/D 8,375 By Balance B/D 2,000
By P & L Adj. A/C 375
By Goodwill 4,000
By Reserve 2,000

8,375 8,375
Q’s Current Account
To Balance C/D 9,375 By Balance B/D 3,000
By P & L Adj. A/C 375
By Goodwill 4,000
By Reserve 2,000
9,375 9,375

R’s Current Account

To Balance C/D 2,500 By P & L Adj. A/C 375
To Capital A/C 3,875 By Goodwill 4,000
By Reserve 2,000
6,375 6,375

R’s Capital Account

To Loan A/C 13,875 By Balance B/D 10,000
By Current A/C 3,875
13,875 13,875

R’s Loan Account

To Balance C/D 13,875 By Capital A/C
13,875
13,875 13,875
By Balance B/D 13,875

Balance Sheet of P and Q

Liabilities Assets
Creditors 5,000 Bank Balance 3,000
Centre For Distance Education 8.12 Acharya Nagarjuna University

R’s Loan A/C 13,875 Bills receivable 5,000

Current Accounts: Debtors 20,000
P 8,375 Less: RBD 1,500 18,500
Q 9,375 17,750 Stock 19,800
Capital Accounts: Fixtures 3,325
P 10,000 Goodwill 12,000
Q 15,000 25,000
61,625 61,625
Illustration 4 :
The Balance Sheet of A, B and C who were sharing profits is proportion to their capitals
stood as follows on December 31, 2007.
Liabilities Assets
Sundry Creditors 6,90,000 Cash at Bank 5,50,000
Capital Accounts: Sundry Debtors 5,00,000
A 20,00,000 Less : Provision 10,000 4,90,000
B 15,00,000 Stock 8,00,000
C 10,00,000 45,00,000 Plant and Machinery 8,50,000
Land and Buildings 25,00,000
51,90,000 51,90,000
B retired on the above date and the following was agreed upon:
1) That stock is depreciated by 6%.
2) That the provision for Doubtful debts be brought up to 5% on Debtors.
3) That the Land and Buildings be appreciated by 20%.
4) That a provision of Rs.7, 700 be made I respect of outstanding legal charges.
5) That the Goodwill of the entire firm be fixed at Rs.10,00,000 and B’s share of it be adjusted
intothe amounts of A and C who are going to share future profits in the ratio 5:3.
6) That the assets and liabilities (except cash) were to appear in the balance sheet at their old
figures.
7) That the entire capital of the firm as newly constituted be fixed at Rs.28,00,000 between A and
C in the proportion of 5:3 (actual cash to be brought in or paid off, as the case may be).
Pass journal entries to give effect to above arrangements. Show the Balance Sheet after B’s
retirement. Also give a statement showing how much cash is brought in by or pay to the partners.
Solution :
Profit sharing ratio of A, B & C 4:3:2 i.e. 4/9;
3/9; 2/9New profit sharing A & C = 5:3 = 5/8; 3/8
Gaining Ratio of A = 5/8 – 4/9 =
13/72 Gaining Ratio of C = 3/8-2/9

= 11/72
 Advanced Accounting 8.13 Partnership Accounts II – Retirement or
death of a partner

= 13:11
Goodwill share given to B, shall be charged to A & C in this ratio.
Total Capital of the firm after B’s retirement = 28,00,000
A’s Capital = 28,00,000 x 5/18 = 17,50,000
C’s Capital = 28,00,000 x 3/8 = 10,50,000
Journal entries:
1. P & L Adj. A/C Dr 1,40,000
To Stock 48,000
To Reserve for bad debts 15,000
To Outstanding legal bills

77,000(Being the assets revalued)

2. Land and Buildings A/C Dr 5,00,000
To P & L A/C 5,00,000
(Being the assets appreciated)
3. P & L A/C Dr 3,60,000
To A’s Capital 1,60,000
To B’s Capital 1,20,000
To C’s Capital 80,000
(Being the profit on revaluation distributed to partners)
4. A’s Capital A/C Dr 1,95,000
C’s Capital A/C Dr 1,65,000
To B’s Capital A/C 3,60,000

(Being the retiring partner’s share of goodwill changed to continuing partners capitals in their
gaining ratio i.e. 13:11)
5. B’s Capital A/C Dr 19,80,000
To B’s Loan A/C 19,80,000
(Being the retiring partner’s claim transferred to his Loan
A/C)
6. A’s Capital A/C Dr 2,25,000
C’s Capital A/C Dr 1,35,000
To P & L Adj. A/C 3,60,000

(Being Loss on revaluation distributed to A & c in their new ratio i.e.5:3; assuming that the valueof
assets and liabilities were reinstated)
7. Cash A/C Dr 2,80,000
To A’s Capital 10,000
To C’s Capital 2,70,000
(Being the shortage in Capital Accounts brought in by partners)
Memorandum P & L Adj. Account
To Stock 48,000 By Land & Buildings 5,00,000
To RBD 15,000
To Outstanding legal bills 77,000
 Centre For Distance Education 8.14 Acharya Nagarjuna University

To C’s Capital 80,000 3,60,000

5,00,000 5,00,000
To Land & Buildings 5,00,000By Sundry Assets&Liabilities 1,40,000

By A’s Capital 2,25,000

By B’s Capital 1,35,000 3,60,000
5,00,000 5,00,000

A’s Capital Account

To B’s Capital (goodwill) 1,95,000By Balance 20,00,000
To P & L Adj. A/C 2,25,000By P & L Adj.A/C 1,60,000
To Balance C/D 17,50,000 By Cash ( brought in) 10,000
21,70,000 21,70,000
By Balance B/D 17,50,000

B’s Capital Account

To Loan A/C 19,80,000 By Balance 15,00,000
By P & L Adj. A/C 1,20,000
By A’s Capital A/C- Goodwill 1,95,000
By C’s Capital A/C – Goodwill 1,65,000
19,80,000 19,80,000

C’s Capital Account

To B’s Capital – goodwil 1,65,000 By Balance 10,00,000
To P & L Adj. A/C 1,35,000 By P & L Adj. A/C 80,000
To Balance C/D 10,50,000 By Cash (brought in) 2,70,000
13,50,000 13,50,000
By Balance B/D 10,50,000
To A’s Capital 1,60,000
To B’s Capital 1,20,000
B’s Loan Account
By Capital 19,80,000
Balance Sheet A & c as on 1-1-2007
Liabilities
Ass
ets
Creditors 6,90,000 Cash 5,50,000+2,80,000 8,30,000
Capitals: Debtors 5,00,000
A 17,50,000 Less: Provision 10,000 4,90,000
C 10,50,000 Stock 8,00,000
B’s Loan A/C 19,80,000 Plant 8,50,000
Land and Buildings 25,00,000
 Advanced Accounting 8.15 Partnership Accounts II – Retirement or
death of a partner

54,70,000 54,70,000

A C
Capitals of partners before the cash brought in 17,40,000 7,80,000
Cash to be brought in 10,000 2,70,000
Illustration 5 :

Bedi and Prasanna were carrying on business, as equal partners. It was agreed that Bedi
should retire from the firm on March 31, 2007, and that his son Chandra should join Prasanna from
1st April, 2007, and should be entitled to one third of the profits. The Balance Sheet on March 31,
2007 was as follows:
Bedi’s Capital 23,800 Cash at bank 7,700
Prasanna’s Capital 19,740 Sundry debtors 11,270
Sundry Liabilities 6,860 Furniture 9,940
Buildings 14,490
Goodwill 7,000
50,400 50,400

On 31st March, 2007, goodwill was valued of Rs.15, 400 and Buildings at Rs.16, 800. It was
agreed that enough money should be introduced to enable Bedi to be paid out and leave Rs.7, 000
cash by way of working capital. Prasanna and A Chandra were to provide such sums aswould make
their capital proportionate to their share of profits. Bedi agreed to make a friendly loan to Chandra
by transfer from his capital account of half the amount which Chandra had to provide.
Prasanna and Chandra paid in cash due from them on 1st April, 2007 and the amount dueto
Bedi was paid out on the same day.
Pass the necessary journal entries and prepare the Balance Sheet as on 1st April, 207.
Solution :
Balance Sheet (after paying off Bedi and after the admission of Chandra)
Liabilities Assets
Sundry Liabilities 6,860 Cash (as per revaluation) 7,000
(no change in revaluation) Debtors(no change) 11,270
Combined Capital of Prasanna Furniture (no change) 9,940
And Chandra (Bal. Fig) 53,550 Buidings (as per revaluation) 16,800
Goodwill (as per revaluation) 15,400
60,410 60,410

Total Capital of Prasanna Chandra after paying off Bedi 55,550 Prasanna’s share 2/3
= 53,550 x 2/3 35,700 Chandra’s share 1/3 = 53,550 x1/3 17,850Less: Transfers from
his father’s A/C(Bedi’s A/C)1/2 8,925Cash to be brought in by Chandra
8,925
Journal Entries:
1. Goodwill A/C Dr 2,310
Centre For Distance Education 8.16 Acharya Nagarjuna University

Buildings A/C Dr 8,400

To P & L Adj. A/C 10,710
(Being the assets appreciated)
2. P & L Adj. A/C Dr 10,710
To Bedi’s Capital 5,355
To Prasanna’s Capital 5,355

(Being the profit on revaluation distributed to partners)

3. Cash A/C Dr 19,530
To Prasanna’s Capital 10,605
To Chandra’s Capital 8,925
(Being shortage of capital brought in by Prasanna and the new partner brings half of his share of
capital)
4. Bedi’s Capital A/C Dr 29,155
To Cash 20,230
To Chandra’s Capital A/C 8,925
(Being retiring partner’s claim settled and some account transferred to his son’s capital (New
partner) A/C)

Balance Sheet of Prasanna and Chandra as on 1-4-2007

Liabilities Assets
Capitals: Cash 7,000
Prasanna 35,700 Debtors 11,270
Chandra 17,850 Furniture 9,940
Sundry Liabilities 6,860 Buildings 16,800
Goodwill 15,400
60,410 60,410
Working Notes:
Bedi’s Capital Account
To Cash 20,230 By Balance 23,800
To Chandra’s Capital A/c 8,925 By P & L Adj. A/C 5,355
29,155 29,155
Prasanna’s Capital Account

By Balance 19,740
By P & L Adj. A/C 5,355
By Cash 10,605
35,700
Chandra’s Capital Account
 Advanced Accounting 8.17 Partnership Accounts II – Retirement or
death of a partner

By Cash 8,925
By Bedi’s Capital 8,925
17,850

Prasanna’s Capital in the new firm: 35,700

Less: Existing Capital after revaluation 25,095
Cash to be brought in 10,605
Cash Account
To Balance 7,700 By Bedi’s Capital 20,230
To Prasanna’s Capital 10,650 By Balance C/D 7,000
To Chandra Capital 8,925 (working capital)
27,230 27,230
To Balance B/D 7,000
Illustration 6 :

A, B and C are partners sharing profits and losses in the proportion of 3:2:1 and their
Balance Sheet of 31st December, 2007 was as follows:
Bills payable 7,560 Cash in hand 250
Creditors 12,300 Cash at bank 960
General Reserve 3,000 Bills receivable 3,300
Capitals: Debtors 7,450
A 10,000 Stock 12,470
B 6,000 Investments 10,430
C 4,000 20,000 Building 8,000
44,860 42,860

B died on February 28 2007 and according to partnership agreement his executor is entitledto
be paid out as follows:
a) The capital to his credit at the time of his death and interest up to the time of his death
at 6% per annum.
b) His appropriate share of general reserve.
c) His share of profit to the date of his death which is to be taken on the basis of preceding
year’s profit.
d)His share of goodwill which is calculated at two year’s purchase of the average profit of
the preceding three years.
The investments were sold for Rs.16,020 and B’s executor was paid off. The profits in the
three preceding years was 2004 – Rs.7,800; 2005 – Rs.9,000; 2006 – Rs.9,600.
Pass the journal entries and write the accounts of B.
Solution :
Journal entries :
1. Interest on capital A/C Dr 60.00
To B’s Capital Account 60.00
Centre For Distance Education 8.18 Acharya Nagarjuna University

(Being the interest for 2 months @ 6% due to B)

2. General Reserve A/C Dr 3,000
To A’s Capital 1,500
To B’s Capital 1,000
To C’s Capital 500

(Being the accumulated profits shared)

3. P & L A/C Dr 533.33
To B’s Capital 533.33
(Being the share of profit on the basis of preceding year’s profit)
4. Goodwill A/C Dr 17,600
To A’s Capital 8,800.00
To B’s Capital 5,866.67
To C’s Capital 2,933.33

(Being the goodwill raised)

(7,800+9,000+9,600=26,400/3x2=17,600)
5. Cash A/C Dr 16,020
To Investment A/C 16,020
(Being the assets sold)
6. B’s Capital A/C Dr 13,460
To B’s executor’s A/C

13,460(Being the claim transferred to executor’s

account)
7. Executor’s Account Dr 13,460
To Cash 13,460
(Being cash paid to the executor)
B’s Capital Account
To Executor’s A/C 13,460.00 By Balance 6,000.00
By Interest on capital
(6,000x2/12x6/100)
By General Reserve 1,000.00
(3,000 x 1/3)

By P & L A/C (9,600x2/12x1/3) 533.33

By Goodwill 5,866.67
13,460.00 13,460.00

Illustration 7 :
A, B and C carried on business in partnership, profits being divisible in 3:2:1. The balance
sheet on 31st December 2006 showed their capitals as Rs.10, 400; Rs. 5,000 and Rs.3, 000
 Advanced Accounting 8.19 Partnership Accounts II – Retirement or
death of a partner

respectively. On 28th February 2007 A died. From the following particulars prepare an account for
presentation to A’s executor.
a) The firm issued the partners’ lives severally A for Rs.9, 000, B for Rs.4, 800 and C for Rs.2,400.
The premiums have been charged to the profit and loss account. The surrender value on 28th
February 2007 was one fourth of the sum assured.
b) Capital carries interest at 5% per annum.
c) A’s drawings from 1st January 2007 to the date of his death were Rs.1, 200.
d) A’s share of profits for the portion of the current year in which he was alive was to be taken
at the sum calculated on the average of the previous three completed years and goodwill was to be
raised on the basis of two years’ purchase of average profits of those three years.
The profits of the three previous completed years were Rs.9, 200; Rs.7, 400 and Rs.8, 600
respectively.
Show A’s account. Take calculations to the nearest rupee.
Solution :
A’s Capital Account
To Drawings 1,200 By Balance

10,400 By Joint life policy 5,400

By Interest on Capital(for 2 months) 87

By P & L A/C(share of profit) 700

To A’s Executor’s A/C 23,787 By Goodwill
8,400
24,987 24,987
A’s Executor’s Account
By A’s Capital A/C 24,987

Working Notes:
Joint Life Policy: A 9,000 ( full value as he leaves the firm)
B (4,800 x ¼) 1,200
C (2,400 x ¼) 600
10,800

A’s share = 10,800 x ½ = 5,400.

Interest on Capital = 10,400 x 5/100 x 2/12 = 87 (approx)
Share of profit = profit for the 3 preceding years =9,200+7,400+8,600=25,200
Average of one year = 25,200/3 = 8,400.
Profit for 2 months = 8,400 x 2/12 =
1,400A’s share = 1,400 x ½ =700
Goodwill: Two years’ purchase of average profits of 3 years
Average profit = 8,400
2 years’ purchase = 8,400x 2 = 16,800
Centre For Distance Education 8.20 Acharya Nagarjuna University

Goodwill = 16,800
A’s share = 16,800 x ½= 8,400.
Illustration 7:
S, J and N were partners sharing profits and losses in the ratio of 3:2:1 on 31 st December
2007. Their balance sheet was as follows:
Creditors 8,000 Goodwill 6,000
General Reserve 9,000 Buildings 20,000
Capitals: Patents
5,000
S 35,000 Machinery 15,000
J 20,000 Stock 8,000
N 15,000 70,000 Debtors 8,000
Cash at Bank 25,000
87,000 87,000
J died on 1st July 2007. The following terms and conditions were agreed upon betweenher
executor and the remaining partners.
a) Goodwill was valued at 1 ½ years purchase price of past three years’ profits which were as
follows:
2004 16,000
2005 8,000
2006 12,000
b) Patents were valued at Rs.8, 000; buildings at Rs.25, 000; and machinery at
Rs.24,000.
c) Profit up to the date of death of J was to be taken on the basis of the average profits of
the past three years.
d) Interest on capital at 5% per annum was to be charged.
e) Cash amounting to Rs.7, 500 was paid immediately and the balance due to the executorof
the deceased was payable together with interest at 6% per annum in two equal yearly
installments.
f) Reserve for bad and doubtful debts was to be provided for an amount of
Rs. 1,000.
g) J’s drawings up to the date of his death were Rs.4, 000.
Draft the necessary journal entries to record the above transactions and prepare J’s capitalaccount as on
the date of her death.
Solution :
Journal entries:
1. General Reserve A/C Dr 3,000
To J’s Capital A/C 3,000
(Being J’s share in the reserve transferred to his capital account)
2. Goodwill A/C Dr 12,000
Patents A/C Dr 3,000
Buildings A/c Dr 5,000
 Advanced Accounting 8.21 Partnership Accounts II – Retirement or
death of a partner

Machinery A/C Dr 9,000

To P & L Adj. A/C 29,000
(Being Assets revalued)
3. P & L Adj. A/C Dr 1,000
To Reserve for bad debts 1,000
(Being provision credited on debtors)
4. P & L Adj. A/C Dr 28,000
To S’s Capital 14,000

To J’s Capital 9,333

To N’s Capital 4,667
(Being profit on revaluation distributed)
5. Profit and Loss Suspense A/C Dr 2,000
To J’s Capital A/C 2,000
(Being the share of profit of J for six months transferred to his account)
6. Interest on Capital A/C Dr 500
To J’s Capital A/C 500
(Being interest on Capital for six months transferred to his account)
7. J’s Capital A/C Dr 30,833
To Executor’s A/C 30,833
(Being J’s capital balance transferred to his Executor’s account)
8. Executor’s A/C Dr 7,500
To Cash 7,500
(Being part payment made)
J’s Capital Account
To Drawings 4,000 By Balance B/D 20,000
To Executor’s A/C 30,833 By Reserve 3,000
By P & L Adj. A/C 9,333
By P & L Suspense A/C 2,000
By Interest on Capital 500

34,833 34,833
Executor’s Account
To Cash 7,500 By J’s Capital A/C 30,833
To Balance C/D 23,333
30,333 30,333
By Balance B/D 23,333
Working Notes :
Goodwill 1 ½ years purchase of the average profit of preceding 3 years
3 years profit = 16,000+8,000+12,000=36,000
1 year average =
36,000/3=12,000 11/2 years average =
Centre For Distance Education 8.22 Acharya Nagarjuna University

12,000 x 1 ½ = 18,000
Less: Goodwill already in the balance sheet = 6,000
Increase in goodwill =12,000
Illustration 8 :
A and B who share profit in the ratio of 3:2, took out a joint life policy on 1st May, 2000 for
Rs.30, 000. The annual premium was Rs.1, 300. The surrender value of the policy was:
2000 – Nil; 2001 – Rs.400; 2002 – Rs.900; 2003 – Rs.1, 450.
B died on 15th September, 2003 and the amount of the policy was received on 31st
December, 2003. The books are closed on December 31 each year.
Give journal entries if premium paid is written off to profit and loss account each year.
Solution :
Journal Entries:
May 1, 2000 Joint life policy A/C Dr 1,300
To Cash 1,300
(Being the 1st premium paid on Joint
Policy)Dec 31,2000 P & L A/C Dr
1,300
To Joint Policy Reserve A/C 1,300(Being the reserve
created for Joint Policy)
Joint Life Policy Reserve A/C Dr 1,300
To Joint Life Policy 1,300
(Being the surrender value taken into
account)May 1, 2001 Joint Life Policy A/c Dr
1,300
To Cash 1,300
(Being the 2nd premium paid)
Dec 31, 2001 P & L A/C Dr 1,300
To Joint Life Policy Reserve 1,300(Being the reserve
created for Joint Life Policy)
Joint Life Policy Reserve A/C Dr 900
To Joint Life Policy 900
(Being the surrender value of Rs.400 taken into
account)May 1, 2002 Joint Life Policy A/C Dr 1,300
To Cash 1,300
(Being 3rd premium paid)
Dec 31, 2002 P & L A/C Dr 1,300
To Joint Life Policy Reserve1,300(Being the reserve created)

Joint Life Policy Reserve A/C Dr 800

To Joint Life Policy 800
(Being the surrender value Rs.900 taken into account)May 1.2003
Joint Life Policy A/C Dr 1,300
To Cash 1,300
 Advanced Accounting 8.23 Partnership Accounts II – Retirement or
death of a partner

(Being the 4th premium paid)

Dec 31, 2003 Cash A/C Dr
30,000
To Joint Policy 30,000
(Being the policy surrendered due to the death of a partner and cash received)Joint Life
Policy Reserve A/C Dr 900
To Joint Life Policy 900
(Being the reserve cancelled)
Joint Life Policy A/C Dr 28,700
To A’s Capital 17,220
To B’s Capital 17,220
(Being the policy amount distributed among the
partners)Working Notes:
Joint Life Policy Account
1-5-00 To Cash 1,300 31-12-00By Joint Life Policy Reserve 1,300
1-5-01 To Cash 1,300 31-12-01 By Joint Life Policy Reserve 900
By Balance C/D 400
1,300 1,300
1-1-02 To Balance B/D 400 31-12-02 By Joint Life Policy Reserve 800
1-5-02 To Cash 1,300 By Balance C/D 900
1,700 1,700
1-1-03 To Balance B/D 900 31-12-03 By Cash 30,000
1-5-03 To Cash 1,300 By Joint Life Policy reserve 900
To A’s Capital 17,220
To B’s Capital 11,480 28,700
30,900 30,900
Joint Life Policy Reserve Account
31-12-00 To Joint Life Policy 1,300 31-12-00 By P & L A/C 1,300
31-12-01 To Joint Life Policy 900 31-12-01 By P & L A/C 1,300

To Balance C/D 400

1,300 1,300
31-12-02 To Joint Life Policy 800 1-1-02 By Balance B/D 400

To Balance C/D 900 31-12-02 By P & L A/C 1,300

1,700 1,700
31-12-03 To Joint Life Policy 900 1—1-03 By Balance B/D 900
Illustration 9 :
Shiv, Shankar and Shambu took a joint life policy on 10th January, 2000, to provide the
necessary amount at the time a partner’s death. The policy amount is
Rs.40, 000. On 10th January 2003 they paid Rs.1, 000 as last annual premium. Shiv died on 20th
February 2003. The surrender value of the policy was as follows:
Centre For Distance Education 8.24 Acharya Nagarjuna University

2000 - Nil: 2001 - 250; 2002 - 450;

After the death of Shiv, on 1st March the policy amount received. Pass the necessary
journal entries regarding the policy for three years. Show the final adjustment after Shiv’s death.

Partners share profits in 2:1 ratio and close the books every year on 31st December.
Solution :
Journal Entries:
10-1-00 Joint Life Policy A/C Dr 1,000
To Cash 1,000
(Being the first premium paid)
31-12-00 P & L A/C Dr 1,000
To Joint Life Policy Reserve 1,000

(Being the premium transferred to P & L A/C and created

reserve)Joint Life Policy Reserve A/CDr 1,000
To Joint Life Policy A/C 1,000
(Being the surrender value taken into account)
10-1-01 Joint Life Policy A/C Dr 1,000
To Cash 1,000
(Being the second premium paid)
31-12-01 P & L A/C Dr 1,000
To Joint Life Policy Reserve A/C 1,000
(Being the premium transferred to P & L A/C)
Joint Life Policy Reserve A/C Dr 750
To Joint Life Policy 750
(Being the surrender value taken into account)
10-1-02 Joint Life Policy A/C Dr 1,000
To Cash 1,000
(Being the third premium paid)
31-12-02 P & L A/C Dr 1,000
To Joint Life Policy Reserve 1,000

(Being the premium transferred to P & L

A/C)Joint Life Policy Reserve A/C Dr

800
To Joint Life Policy 800
(Being the surrender value taken into account)
10-1-03 Joint Life Policy A/C Dr 1,000
To Cash 1,000
(Being fourth premium paid)
 Advanced Accounting 8.25 Partnership Accounts II – Retirement or
death of a partner

1-3-2003 Cash A/C Dr 40,000

To Joint Life Policy 40,000

(Being the policy amount received)

Joint Life Policy A/C Dr 3,000

To Shiv’s Capital 9,750

To Shankar’s Capital 9,750

To Shambu’s Capital 9,750

(Being the policy amount distributed to

partners)Joint Life Policy Reserve A/CDr 450
To Joint Life Policy 450
(Being the reserve account written off)
Joint Life Policy Account
10-1-00 To Cash 1,000 31-12-00By Joint Life Policy Reserve 1,000

10-1-01 To Cash 1,000 31-12-01By Joint Life Policy Reserve 750

By Balance C/D 250

1,000 1,000

1-1-02 To Balance B/D 250 31-12-02By Joint Life Policy Reserve 800

To Cash 1,000 By Balance C/D 450

1,250 1,250

1-1-03 To Balance B/D 450 1-3-03 By Cash 40,000

10-1-03 To Cash 1,000 By Joint Life Policy Reserve 450

To Shiv’s Capital 19,500

Centre For Distance Education 8.26 Acharya Nagarjuna University

To Shankar’s Capital
9,750To Sambu’s
Capital 9,750
40,450 40,450
Joint Life Policy Reserve Account
31-12-00 To Joint Life Policy A/C 1,000 31-12-00 By P & L A/C 1,000
31-12-01 To Joint Life Policy A/C 750 31-12-01 By P & L A/C 1,000
To Balance C/D 250
1,000 1,000
31-12-02 To Joint Life Policy A/C 800 1-1-02 By Balance B/D 250
To Balance C/D 450 31-12-02 By P & L A/C 1,000
1,250 1,250

1-3-03 To Joint Life Policy A/C 450 1-1-03 By Balance B/D 450
8.5 TRY YOURSELF :
1. A, B and c were carrying on business in partnership sharing profits and losses in the ratio of 3:2:1.
On 31st December 2003, Balance Sheet of the firm stood as follows:
Liabilities Assets
Sundry Creditors 13,590 Cash 5,900
Capital Accounts: Debtors 8,000
A 15,000 Stock 11,690
B 10,000 Buildings 23,000
C 10,000 35,000
48,590 48,590

B retired on the above mentioned date on the following terms:

i) Buildings are to be appreciated by Rs.7, 000.
ii) Provision for bad debts is to be made @ 5% on debtors.
iii) Goodwill of the firm is to be valued at Rs.9, 000 and adjustment is this respect to be made
without raising goodwill account.
iv) Rs.5, 000 is to be paid to B immediately and the balance due to him be treated as a loan carrying
interest @ 6% per annum. Pass journal entries to record the above transactions and show the
Balance Sheet of the firm as it would appear immediately after B’s retirement.
(A’s Capital: Rs.16, 050; C’s Capital: Rs.10, 350; B’s Loan A/C: Rs.10, 200)
2. The Balance Sheet of X,Y and Z who were sharing profits in the ratio of 4:3:2 respectively stoodas
follows on 31st December, 2007:
Liabilities Assets
Sundry Creditors 4,140 Cash at Bank 3,300
Capital Accounts: Sundry Debtors 3,045
 Advanced Accounting 8.27 Partnership Accounts II – Retirement or
death of a partner

X 12,000 Less: Provision 105 2,940

Y 9,000 Stock 4,800

Z 6,000 27,000 Plant and Machinery 5,100

Land and Buildings 15,000

31,140 31,140

Y having given notice to retire from the firm, the following adjustments in the books of the firm
were agreed upon:
1. That land and buildings are appreciated by 10%.
2. The provision for bad debts is no longer necessary.
3. That the stock is to be appreciated by 20%.
4. That adjustment is to be made in the accounts to rectify a mistake previously made whereby Y
was credited in excess by Rs.810 while X and Y were debited in excess by Rs.420 and Rs.390
respectively.
5. That the goodwill of the firm is to fixed at Rs.5, 400 and Y’s share of the same is to be adjusted
to that of X and Z who are going to share in future profits in the ratio of 2:1.
6. That the entire capital of the firm, as newly constituted, will be readjusted by fringing in or
paying of cash so that the future capital of X and Z is in the ratio of 2:1.
Pass journal entries and prepare the Balance Sheet of the new firm showing Y’s balanceas loan.
(New capitals of X Rs.12, 480; Z Rs.6, 240; Y’s loan A/C Rs.10, 845; B/S total
Rs.33, 705)
3. Gupta, Badal and sinha are in partnership sharing profits and losses in the ratio of 2:2:1. Sinha
retires on 31st December, 2007. The Balance Sheet of the firm on the date of retirement of Sinhais
as follows:
Liabilities Assets

Creditors 2,300 Cash in hand 500

General Reserve 2,500 Cash at Bank 3,000

Centre For Distance Education 8.28 Acharya Nagarjuna University

Capitals: Debtors 6,000

Gupta 10,000 Stock 10,000

Badal 8,000 Buildings 8,000

Sinha 7,200 25,200 Furniture 2,000

Profit & Loss Account 500 Goodwill 1,000

30,500 30,500

The following adjustments are to be made:

1. Buildings are to be revalued at Rs.10, 000.

2. Bad debts to be written off Rs.400.

3. Stock is to be revalued at Rs.9 000.

4. Furniture is to be revalued at Rs.1, 800.

5. The Goodwill of the firm is to be completely written off.

6. It was agreed to pay Rs.2, 000 only to the sundry creditors in full settlement of their dues.

7. The amount available at Bank is agreed to be paid to Sinha and the balance of the amount
due to Sinha to be transferred to his loan account.

You are required to prepare capital accounts of the partners, profit and loss adjustmentaccount and
balance sheet of the firm.
(New Capitals: Gupta: Rs.11,080; Badal: Rs.9, 80; Sinha Loan A/C: Rs.4,740; Total ofBalance
Sheet: Rs.26,900)

4. Amit, Dharam and Rajesh were partners sharing profits and losses in the ratio of 5:3:2. They had
taken out a joint life policy of the face value of Rs.24,000. On 31st December 2007 its surrender
value was Rs.4,800 on this date the balance sheet of the firm stood as under:

Liabilities Assets

Sundry creditors 6,360 Fixed assets 30,000

 Advanced Accounting 8.29 Partnership Accounts II – Retirement or
death of a partner

Expenses outstanding 840 Stock 13,200

Reserve 3,600 Book debts 10,800

Capitals: Cash at bank 2,400

Amit 24,000

Dharam 12,000

Rajesh 9,000 45,600

56,400 56,400

On this date Dharam decided to retire and for this purpose: i) goodwill was valued at Rs.18,
000; ii) fixed assets were valued at Rs.36, 000 and iii) stock was considered as worth Rs.12, 000.
Dharam to be paid through cash brought in by Amit and Rajesh in such a way as to make
their capitals proportionate to their new profit sharing ratio which was Amit 3/5 and Rsjesh 2/5.
Goodwill was to be passed through books without raising a goodwill account. The joint life policy
was also not to appear in the balance sheet.
Record these matters in the journal of the firm and prepare the resultant balance sheet.
(New Capitals: Amit: Rs.32,400; Rajesh: Rs.21,600;Cash to Dharam: Rs.21,360; Total of Balance
Sheet: Rs.61,200)

5. X, Y and Z were partners sharing profits in 6:4:3. The amount payable to the expired partner will
be paid 40% in the first year, 40% in the second year and 20% in the third year. To ascertain the
amount of an expired partner, the following items should be taken into account:

1. Share of profit should be calculated basing on the profits of the year in which the partner died.
2. Goodwill should be calculated basing on the two years’ purchase of the average profits of the
preceding three years profits plus the profits of the year in which the partner died up to the date
ofhis death.
3. Interest should be calculated at 6% on capital.
Centre For Distance Education 8.30 Acharya Nagarjuna University

X died on 1st January 2004. Business closes every year on 31st March. Profits of the preceding
years were:
2000-01 42,000

2001-02 46,500

2002-03 48,000

2003-04 52,000

st
X Capital on 31 March 2003 was Rs.20, 000; X drawings from 31st March 2003 to 1 st
January 2004 were Rs.6, 200. Show X executor’s account up to full payment.
(X executor’s account (beginning balance): Rs.75, 750; Last installment Rs.16, 059 (including
interest))

8.6 SUMMARY :
This lesson dealt with the accounting procedure when a partner retires or dies in the firm.
The retirement or death basically makes no difference as the existing partners have to pay his part.
However, in certain aspects there are some differences. The retired partner’s due is transferred to
his loan account and will be paid later. The deceased partner’s due is transferred to his executor’s
account and will be paid immediately or with interest. Treatment of goodwill andrevaluation of
assets and liabilities are almost same as in admission of partnership. Joint Life Policy helps the
partnership firm when a person dies and it has three methods of accounting treatment.

8.7 GLOSSARY :
Joint Life Policy: It is a policy taken on the lives of partners to meet the commitment when a
partner dies.

8.8 SELF ASSESSMENT QUESTIONS :

1. How goodwill is treated when a partner dies?
2. What are the accounting differences in retirement and death of a partner?
3. Explain the methods of Joint Life Policy treatment when a partner dies?

Dr. R. Jayaprakash Reddy.

 LESSON - 9
PARTNERSHIP ACCOUNTS III: ALGAMATION
OBJECTIVES :
After going through the lesson you will be able to understand the following:

1. Meaning and purpose of amalgamation in partnership firms.

2. Method of accounting.
STRUCTURE OF THE LESSON :
9.1 Meaning of amalgamation
9.2 Journal entries
9.3 Illustrations
9.4 Try yourself
9.5 Summary
9.6 Glossary
9.7 Self Assessment Questions

9.1 MEANING OF AMALGAMATION :

When two or more firms of similar nature merge, there come many economies. Because of this,
often firms merge or amalgamate themselves. The partners in the old firm continue in the new firm.
They reach an agreement regarding the revaluation of assets, future sharing of profits and other
modalities. These require separate entries in the books of old partnership firms and new firm. After
amalgamation, the firm will continue the operations and the old partnership firms ceased to exist. For
example, A &B firm and C & D firms may amalgamate and become A, B, C & D firm. The partners in
the old firms become partners of the new firm. Their old firms will be closed down after amalgamation.

9.2 JOURNAL ENTRIES :

The following journal entries are required in the books of old firms and new firm when
amalgamation takes place:
Books of Old Firms
1. For Goodwill: The value of goodwill will be ascertained in case of each firm and the amount will
be credited to their respective partners’ capital accounts in their respective books.
Goodwill A/C Dr
To Partners’ Capital A/C
3. Reserve and other undistributed profits: They will be credited to the partners of each of the
firms in their respective books.
Reserves Dr

P & L A/C Dr
To Partners’ Capital A/C
In case of losses the entry will be reversed.
Centre For Distance Education 9.2 Acharya Nagarjuna University

3. Revaluation of assets and liabilities: A profit and loss adjustment account will be opened in each
firm’s books. The profit or loss will be credited or debited to their partners’ capital accounts in the
old profit sharing ratio.
i) For increase in the value of assets or decrease in the value of liabilities:
Assets/Liabilities Dr
To P & L Adj. A/C ii) For decrease in the value of assets or increase in
the value of liabilities:
P & L Adj. A/C Dr
To Assets/Liabilities
iii) For distribution of profits:
P & L Adj. A/C Dr
To partners’ Capital A/Cs In case
of loss the entry will be reversed
4. For an asset taken over by a partner:
Partner’s Capital A/C Dr
To Asset A/C
5. For a liability taken over by a partner:
Liability A/C Dr
To Partner’s Capital A/C
6. For assets and liabilities taken over by the new firm:
New Firm Dr
Liabilities A/C Dr
To Assets A/C
7. Assets or Liabilities not taken over by the new firm will be either sold away or paid off andany
profit or loss on such selling or payment will be transferred to partners’ capital accounts in their
profit and loss sharing ratio. In case they are not disposed off, the will be transferred to partners’
capital accounts in the ratio of their capitals.
8. Partners’ capital accounts will be closed by transferring them to the new firm’s account.
Partners’ Capital A/Cs Dr
To New Firm A/C
Books of New Firm
1. For assets and liabilities taken over:
Assets taken over Dr
To Liabilities taken over
To Partners’ Capital A/Cs
2. For any further contribution towards capital by the partners:
Advanced Accounting 9.3 Partnership Accounts III : Amalagamation

Bank A/C Dr
To Partners’ Capital A/Cs
3. For any capital withdrawn by the partners:
Partners’ Capital A/Cs Dr
To Bank
9.3 ILLUSTRATIONS :
Illustration 1:
X and Y are two sole traders, their Balance Sheets as on 1st January 2007 are given below:
Balance Sheet of X
Sundry creditors 8,000 Plant and Machinery 10,000
Capital Account 20,000Stock in trade 5,000
Sundry debtors 11,000
Cash at bank 2,000

28,000 28,000

Balance Sheet of Y

Sundry creditors 8,000Plant and Machinery 10,000

Capital Account 20,000Stock in trade 5,000
Sundry debtors 11,000
Cash at bank 2,000
28,000 28000
They agree to amalgamate their business as on 1-1-2007. The following revaluations were to
be made:
a) Plant and Machinery were to be reduced by 10%.
b) Stock in trade was to be reduced in case of X by 20% and in the case of Y 10%.
c) A reserve of 2 ½ % is to be made against Sundry debtors.
d) Each partner is to be credited with goodwill of Rs.5, 000.
You are required to give journal entries for recording the above transactions in the books of X
and Y. Give also the amalgamated Balance Sheet of the partners as on 1-1-2007.
Solution:
Books of X
Journal Entries:
1. P & L Adj. A/C Dr 2,275

1,000
Centre For Distance Education 9.4 Acharya Nagarjuna University

To Plant and Machinery

To Stock in trade 1,000

275
To Reserve for bad debts
(Being the assets value reduced)

2. Capital A/C Dr 2,275

To P & L Adj. A/C 2,275

(Being loss transferred to capital)

3. Goodwill A/C Dr 5,000

To Capital 5,000

(Being goodwill transferred to capital)

4. Creditors A/C Dr 8,000
Reserve for bad debts A/C Dr 275
New firm A/C Dr 22,725

To Goodwill 5,000

To Plant and Machinery 9,000

To Stock in trade 4,000

To Debtors 11,000
To Bank 2,000
(Being various assets and liabilities transferred to the new firm)
5. Capital A/C Dr 22,725

To New firm 22,725

(Being the capital account closed)
Books of Y
Journal Entries:
1. P & L Adj. A/C Dr 1,175
To Plant and Machinery 1,000
To Stock in trade 500

To Reserve for bad debts 275

(Being assets value reduced)

2. Capital A/C Dr 1,775

To P & L Adj. A/C 1,775

(Being loss transferred to capital)

3. Goodwill A/C Dr 5,000
Advanced Accounting 9.5 Partnership Accounts III : Amalagamation

To Capital 5,000

(Being goodwill transferred to capital)

4. Creditors A/C Dr 8,000
Reserve for bad debts A/C Dr 275
New firm A/C Dr 23,225
To Goodwill 5,000
To Plant and Machinery 9,000
To Stock in trade 4,500
To Debtors 11,000
To Bank 2,000
(Being various assets and liabilities transferred to the new firm)
5. Capital A/C Dr 23,225
To New firm 23,225
(Being the capital account closed)
Balance Sheet of the New Firm
Liabilities Assets
Sundry Creditors 16,000Goodwill 10,000
Capitals: Plant and Machinery 18,000 X 22,725 Stock in trade 8,500
Y 23,,225 45,950Debtors 22,000
Less: RBD 550 21,450
Bank 4,000
61,950 61,950

Illustration 2:
The following were the Balance Sheet of M/S A & B M/S C and D on December31, 2007.
Liabilities Assets
A&B C&D A&B C&D
Sundry Creditors 40,000 50,000Cash at Back 11,200 13,400
Mrs.A’s Loan 10,000 Stock 40,800 36,600
Capitals: Sundry Debtors 30,000 40,000

A 80,000 Furniture 8,000 10,000

B 40,000 Premises 80,000 —
Centre For Distance Education 9.6 Acharya Nagarjuna University

C 48,000Investments ——— 30,000

D 32,000
1, 70,000 1, 30,000 1, 70,000 1,30,000
st
The two firms decided to amalgamate their businesses as from 1 January, 2007. For
this purpose it was agreed that Mrs.A’s loan should be repaid and that the investments of M/ C C and D
be not taken over by the new firm. Goodwill of M/S A and B was fixed at Rs.16, 000 and that of M/S
C and D at Rs.20, 000. Premises were revalued at Rs.1, 00,000 but the stock of M/S A and B was found
over-valued by Rs.8, 000. The stock of M/S C and D was under valued by Rs.4, 000. A provision of
5% was created for bad debts of both the firms. The total capital of the new firm was to be Rs.80, 000
and the capital of each partner was to be in his profit-sharing ratio which was to be 3:2:3:2. Goodwill
account in the new firm was to be written off.

Close the books of the two firms and pass opening entries of M/S A, B, C and D. Also give
the Balance Sheet of the newly constituted firm.

Solution:
Books of M/S A and B
1. Mrs A’s Loan A/C Dr 10,000
To Cash 10,000
(Being the loan paid off before amalgamation)
2. P & L Adj. A/C Dr 9,500
To Stock 8,000
To Reserve for bad debts 1,500
(Being the assets revalued)
3. Premises A/C Dr 20,000
To P & L Adj. A/C 20,000
(Being the asset appreciated)
4. P & L Adj. A/C Dr 10,500
To A’s Capital 5,250
To B’s Capital 5,250
(Being the profit on realization shared to partners)

5. Goodwill A/C Dr 16,000

To A’s Capital 8,000
To B’s Capital 8,000
(Being the goodwill raised)

6. M/S A, B, C and D A/C (New firm)Dr 1,46,500

Creditors A/C Dr 40,000
RBD A/C Dr 1,500
To Cash 1,200
Advanced Accounting 9.7 Partnership Accounts III : Amalagamation

To Stock 32,800
To Debtors 30,000
To Furniture 8,000
To Premises 10,000
To Goodwill 16,000

(Being the assets and liabilities transferred to new firm)

7. A’s Capital A/C Dr 93,250 B’s Capital A/C Dr 53,250
To A,B,C and D (New firm) 1,46,500
(Being the capitals transferred to new firm)
Books of C and D
1. P & L Adj. A/C Dr 2,000

To RBD 2,000

(Being the asset revalued)

2. Stock A/C Dr 4,000

To P & L Adj. 4,000

(Being the asset revalued)

3. P & L Adj. A/C Dr 2,000

To C’s Capital 1,000

To D’s Capital 1,000

(Being the profit on revaluation shared to partners)

4. Goodwill A/C Dr 20,000

To C’s Capital 10,000

To D’s Capital 10,000

(Being the goodwill raised)

5. C’s Capital A/C Dr 18,000
D’s Capital A/C Dr 12,000
To Investments 30,000
(Being the asset not taken over by the new firm shared to partners in their capital ratio)
6. M/S A, B, C and D A/C Dr 72,000
Creditors A/C Dr 50,000
RBD A/C Dr 2,000
Centre For Distance Education 9.8 Acharya Nagarjuna University

To Cash 13,400
To Stock 40,600
To Debtors 40,000
To Furniture 10,000
To Goodwill 20,000
(Being the assets and liabilities transferred to new firm)
7. C’s Capital A/C Dr 41,000

D’s Capital A/C Dr 31,000

To A, B, C and D A/C 72,000

(Being the capitals transferred)
Books of A, B, C and D
1. Cash A/C Dr 14,600
Stock A/C Dr 73,400
Debtors A/C Dr 70,000
Furniture A/C Dr 18,000
Premises A/C Dr 1,00,000
Goodwill A/C Dr 36,000
To Creditors 90,000
To RBD 3,500
To A’sCapital 93,250
To B’s Capital 53,250
To C’s Capital 41,000
To D’s Capital 31,000

(Being the assets and liabilities of old firms acquired)

2. A’s Capital A/C Dr 10,800 B’s Capital A/C Dr 7,200

C’s Capital A/C Dr 10,800

D’s Capital A/C Dr 7,200

To Goodwill 36,000

(Being the goodwill written off)

3. Cash A/C Dr 26,000

To C’s Capital 17,800

To D’s Capital 8,200
Advanced Accounting 9.9 Partnership Accounts III : Amalagamation

(Being the cash brought in partners to make their capitals proportionate to the profit sharing ratio)
4. A’s Capital A/C Dr 34,450
B’s Capital A/C Dr 14,050
To A’s Current A/C 34,450
To B’s Current A/C 14,050
(Being the surplus amount in capitals transferred to current accounts, as there is no sufficient cash)
Balance Sheet of M/S A, B, C, and D as on 1-1-2007
Liabilities Assets
Capitals: Cash 40,600
A 48,000Stock 73,400
B 32,000 Debtors 70,000
C 48,000 Less: RBD 3,500 66,500
D 32,000Furniture 18,000
Current Accounts: Premises 1,00,000

A 34,450

B 14,050

Creditors 90,000

2,98,500 2,98,500
Note: The assets and liabilities not taken over the new firm are to be transferred to capital accounts of
respective partners in their capital ratio.
Capitals of Partners of the New Firm
A B C D

Capitals transferred Less goodwill 82,450 46,050 30,200 23,800

Less: Capitals to be in the new firm 48,000 32,000 48,000 32,000
Cash to be payable or to be brought in (-) 34,450 14,050 -17,800 – 8,200
Illustration 3:
Richard and Lloyd have been carrying on businesses as general merchants. They decided to
amalgamate, and, henceforth, trade under the name of R&L on the following terms:
1. Each partner shall have a fixed capital of Rs.40, 000.
2. Richard’s stock is to be brought in at Rs.12, 800 and Lloyd’s at Rs.10, 800.
3. Provisions for Bad debts are to be increased to 6% on debtors.
4. Lloyd’s furniture is not to be taken over while Richard’s furniture is to be taken at Rs.1,800.
5. Richard is to pay the loan from his son before amalgamation.
Centre For Distance Education 9.10 Acharya Nagarjuna University

6. Any deficiency on the net assets brought in is to be paid into the firm’s bankers while any
excess is to be withdrawn.
Richard’s Balance Sheet on 31-12-2007
Liabilities Assets
Creditors 4,800 Furniture and Fixtures 1,400
Loan from his son 2,400 Machinery 20,000
Capital 42,540 Stock in trade 13,600

Debtors 11,000

Less: RBD 480 10,520

Cash at Bank 4,220

49,740 49,740

Lloyd’s Balance Sheet on 31-12-2007

Liabilities Assets
Creditors 8,400 Furniture and fixtures 800
Capital 40,400Machinery 22,000

Stock in trade 11,200

Debtors 12,100
Less: RBD 500 11,600
Cash at Bank 3,200
48,800 48,800
Give journal entries necessary to adjust each trader’s books prior to amalgamation and the
opening journal entries and the Balance Sheet of M/S R & L.
Solution:
Books of Richard
1. Loan from his son A/C Dr 2,400

To Cash 2,400
(Being the loan paid off)
2. Furniture A/C Dr 400
Capital A/C Dr 580
To Stock 800
To RBD (660-480) 180
(Being the assets revalued and loss debited to capital account)
Note: As there is one partner (Sole trader) the profit or loss arising out of revaluation can be credited
or debited to his capital account directly. No need of Preparation of P & L Adj. Account.
3. M/S R & L A/C (New firm) Dr 41,960
Advanced Accounting 9.11 Partnership Accounts III : Amalagamation

Creditors A/C Dr 4,800 RBD A/C Dr 600

To Furniture 1,800
To Machinery 20,000
To Stock 12,820
To Debtors 11,000
To Cash 1,820
(Being the assets and liabilities transferred to new firm)
4. Capital A/C Dr 41,960
To M/S R & L (New firm) 41,960
(Being the capital transferred to new firm)
Books of Lloyd
1. Capital A/C Dr 1,426
To Furniture 800
To Stock 400
To RBD (726 – 500) 226
(Being the asset not taken over by the new firm, i.e. Furniture and loss on revaluation debited to
capital Account)
2. M/S R & L A/C (New firm) Dr 38,974
Creditors A/C Dr 8,400
RBD A/C Dr 726
To Machinery 22,000 To Stock 10,800 To Debtors
12,100

To Cash 3,200
(Being the assets and liabilities transferred to new firm)
3. Capital A/C Dr 38,974
To M/S R & L (New firm) 38,974
(Being the capital transferred to new firm)
Books of M/S R & L (New Firm)
1. Furniture A/C Dr 1,800 Machinery A/C Dr 42,000 Stock
A/C Dr 23,600 Debtors A/C Dr 23,100 Cash A/C
Dr 5,020

To Creditors 13,200
To RBD 1,386
To Richard’s Capital 41,960
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To Lloyd’s Capital 38,974

(Being the assets and liabilities of both firms acquired)
2. Cash A/C Dr 1,026
To Lloyd’s Capital 1,026
(Being the cash brought in partner to make his capital Rs.40, 000)
3. Richard’s Capital A/C Dr 1,960
To Cash 1,960
(Being the surplus capital paid to partner, to make his capital Rs.40, 000)
Balance Sheet of M/S R & L as on 31-12-2007
Liabilities Assets
Capitals: Furniture 1,800
Richard 40,000 Machinery 42,000
Lloyd 40,000 Stock 23,600
Creditors 13,200 Debtors 23,100

Less: RBD 1,386 21,714

Cash (See note) 4,086
93,200 93,200
Note:
Cash: Balance transferred 5,020
Add: Brought in by Lloyd 1,026
6,046
Less: Paid to Richard 1,960
4,086
Illustration 4 :
R and S are partners sharing profits and losses equally in a business similar to that carried on
by T. In order to avoid competition they decided to amalgamate the two businesses by taking over the
assets and liabilities of T and admitting him into partnership with them as from 1st January, 2007. Their
Balance Sheets as at 31st December, 2006 were as follows:
Liabilities R&S T Assets R&S T
Sundry creditors 15,000 37,500 Cash 300 700
Bank overdraft 5,000 32,000 Debtors 35,000
Bills payable — 3,000 Less: Provision1,500 33,500 25,000
Loan — 10,500 Stock 21,200 26,300
Capital Accounts: Investment — 27,000
R 20,000 T’s Capital (over drawn) — 4,000
S 15,000 35,000 ——
55,000 83,000 55,000 83,000
Advanced Accounting 9.13 Partnership Accounts III : Amalagamation

The new partnership is to be carried on as R, S and T and it was agreed among all the partners
that the book debts of both the businesses should be provided with bad debts provisions at 10% and
the stock to be reduced by 5% for the purpose of amalgamation and that the investments of T should
be valued at Rs.35, 000 and that T was credited with a sum of Rs.5, 000 for goodwill. It was further
agreed that in order to raise the total capital of the firm to Rs.60, 000, each partner shall introduce
such sum as would make his capital in the new business equal to one third of the capital.

Give journal entries in the books of the new firm and show amalgamated Balance Sheet as at
1st January 2007.

Solution:
Books of the New Firm
1. Cash A/C Dr 300
Debtors A/C Dr 35,000
Stock A/C (21,200-1,060) Dr 20,140
To Sundry Creditors 15,000
To Bank Overdraft 5,000
To RBD 3,500
To R’s Capital 18,470

To S’s Capital 13,470

(Being the assets and liabilities of old firm acquired)

R’s Capital 20,000 – 1,530 (loss on revaluation) : 18,470
S’s Capital 15,000 – 1,530 (loss on revaluation): 13,470
Loss on Revaluation: RBD = 3,500 – 1,500 2,000
Stock 1.060
3.060

R’s share 3,060/2 =1,530

S’s share 3,060/2 =1,530

2. Cash A/C Dr 700

Debtors A/C Dr 25,000
Stock A/C (26,300 – 1,315) Dr 24,985
Investments A/C Dr 35,000
Goodwill A/C Dr 5,000
To RBD 2,500
Centre For Distance Education 9.14 Acharya Nagarjuna University

To Sundry Creditors 37,500

To Bank overdraft 32,000
To Bills payable 3,000
To Loan 10,500
To T’s Capital 5,185
(Being the assets and liabilities of old firm acquired)
T’s Capital 4,000
Profit revaluation:
Goodwill 5,000

Investment 8,000
13,000
less: RBD 2,500
Stock 1,315 3,815 9,185
Capital 5,185
3. Cash A/C Dr 22,875
To R’s Capital (20,000 – 18,470) 1,530
To S’s Capital (20,000 – 13,470) 6,530
To T’s Capital (20,000 – 5,135) 14,815
(Being the partners brings cash to make their capital Rs.20, 000 each)
Balance Sheet of R, S and T as on 1-1-2007
Liabilities Assets
Capitals: Cash (300+700+22,875) 23,875
R 20,000 Debtors 60,000
S 20,000 Less: RBD10% 6,000 54,000
T 20,000 Stock (20,140 + 24,985) 45,125
Sundry Creditors 52,500 Investments 35,000
Bank overdraft 37,000 Goodwill 5,000
Loan 10,500
Bills payable 3,000
1, 63,000 1,63,000
Illustration 5:
X &Co. having X and Y as equal partners decided to amalgamate with P& Co. having P and
Q as equal partners on the following terms and conditions:
Advanced Accounting 9.15 Partnership Accounts III : Amalagamation

1. The new firm to take investments at 10% depreciation, land at Rs.80,000, premises atRs.45,000,
Machinery at Rs.9,000 and to take over only the trade liabilities of both the firms. The debtors are
taken over at book values including reserve.

2. The new firm to pay Rs.12, 000 to each firm for goodwill.
3. Typewriters at the written off value of Rs.800, belonging to P & Co. and not appearing in the
Balance Sheet was also not taken over by the new firm.

4. It was also agreed that the furniture belonging to both the firms be not taken over by the new firm.
5. All the four partners in the new firm to bring in Rs.1, 60,000 as capital in equal shares.
The following were the Balance Sheets of both the firms on the date of amalgamation. Balance
Sheets
Liabilities X& Co. Y& Co. Assets X& Co. Y& Co.
Sundry Creditors 20,000 10,000Cash at Bank 15,000 8,000
Bills payable 5,000 ——— Investments 10,000 8,000
Bank Overdraft 2,000 10,000Debtors 10,000
X’s Loan 6,000 Less: Provision 1,000 9,000 8,000
Capitals: Furniture 12,000 6,000
X 35,000 — Premises 30,000 ———
Y 22,000 — Land ———— 50,000

—— 36,000Machinery 15,000 ———

P

Q —— 20,000Goodwill 9,000 ——
General Reserve 8,000 3,000

Investment fluctuation
Fund 2,000 1,000
1, 00,000 80,000 1, 00,000 80,000
Pass journal entries in the books of both the firms and prepare a Balance Sheet of the new
firm.
Solution:
Books of X& Co.
1. P& L Adj. A/C Dr 6,000
Investment fluctuation fund A/C 1,000
To Machinery 6,000
To Investment 1,000
(Being the assets depreciated and decrease in investment value adjusted in investment reserve)
Centre For Distance Education 9.16 Acharya Nagarjuna University

2. Premises A/C Dr 15,000

To P&L Adj. A/C 15,000
(Being the asset appreciated)
3. P&L Adj. A/C Dr 9,000
To X’s Capital 4,500
To Y’s Capital 4,500
(Being the profit on revaluation shared)
4. General Reserve AC Dr 8,000

Investment fluctuation fund A/C Dr 1,000

To X’s Capital 4,500

To Y’s Capital 4,500

(Being the reserve and balance in investment fund shared to partners)
5. Goodwill A/C Dr 3,000

To X’s Capital 1,500

(Being the goodwill adjusted)

6. Bank overdraft A/C Dr 2,000

X’s Loan A/C Dr 6,000

To X’s Capital 4,912

To Y’s Capital 3,088

(Being the liabilities not taken over by the new firm transferred to capital accounts in their capital
ratio i.e. 35:22)
7. X’s Capital A/C Dr 7,368
Y’s Capital A/C Dr 4,632
To Furniture 12,000
(Being the asset not taken over debited to capital accounts)
8. New Firm A/C Dr 74,000
Bills payable A/C Dr 5,000
Creditors A/C Dr 20,000
Reserve for bad debts A/C Dr 1,000
To Bank 15,000
To Investments 9,000
To Debtors 10,000
To Premises 45,000
To Machinery 9,000
Advanced Accounting 9.17 Partnership Accounts III : Amalagamation

To Goodwill 12,000
(Being the assets and liabilities transferred to new firm)

9. X’s Capital A/C Dr 43,044

Y’s Capital A/C Dr 30,956
To New Firm 74,000
(Being the capitals transferred to new firm)
Working Notes:
Goodwill value to be raised is Rs.12, 000 but already Rs.9, 000 is appearing in the Balance
Sheet. The difference only can be adjusted.
Capital Accounts
X Y X Y
To Furniture 7,368 4,632 By Balance 35,000 22,000
To New Firm 43,044 30,956 By P&L Adj. A/C 4,500 4,500

By Gel. Reserve &

Investment fund 4,500 4,500

By Goodwill 1,500 1,500

By Liabilities 4,912 4,912
50,412 35,558
50,412 35,588 Books of
P& Co.

1. Typewriter A/C Dr 800

Land A/C Dr 30,000
To P&L Adj. A/C 30,800
(Being asset revalued and unrecorded asset taken into the books)
2. Investment fluctuation fund A/C Dr 800
To Investments 800
(Being the asset revalued and difference adjusted out of reserve)
3. P&L Adj. A/C Dr 30,800 To P’s Capital 15,400

To Q’s Capital 15,400

(Being the profit on revaluation shared to partners)
4. General Reserve A/C Dr 3,000

Investment fluctuation fund A/C Dr 200

To P’s Capital 1,600

To Q’s Capital 1,600

Centre For Distance Education 9.18 Acharya Nagarjuna University

(Being the reserve and balance in investment fund shared)

5. Goodwill A/C Dr 12,000 To P’s Capital 6,000

To Q’s Capital 6,000

(Being the goodwill created)
6. P’s Capital A/C Dr 4,371

Q’s Capital A/C Dr 2,429

To Furniture 6,000

To Typewriter 6,000
(Being the assets not taken over by the new firm debited to capital of partners in their capital sharing
ratio of 9:5)

7. Bank overdraft A/C Dr 10,000

To P’s Capital 6,429
To Q’s Capital 3,571
(Being the liability not taken over credited to capitals)
8. Creditors A/C Dr 10,000

New Firm A/C Dr 1,05,200

To Bank 8,000

To Investments 7,200
To Debtors 8,000
To Land 80,000
To Goodwill 12,000
(Being the assets and liabilities transferred to new firm)
9. P’s Capital A/C Dr 61,058
Q’s Capital A/C Dr 44,142
To New Firm 1,05,200
(Being the capitals transferred to new
firm) Working Notes:
Capital Accounts

P Q P Q
To Furniture& Type By Balance
36,000 20,000
Writer 4,371 2,429 By P&L Adj. A/C
15,400 15,400
Advanced Accounting 9.19 Partnership Accounts III : Amalagamation

To New Firm 61,058 44,142 By Gen. Reserve

1,600 1,600
By Goodwill
6,000 6,000
By Overdraft
6,429 3,571

65,429 46,571 65,42946,571

Books of New Firm
Balance Sheet of the New Firm

Liabilities Assets

Capitals: Cash at Bank(see working notes) 3,800

X 40,000Investments 16,200

Z 40,000Debtors 18,000

P 40,000Less:Provision 1,000 17,000

R 40,000Machinery 9,000
Creditors 30,000Premises 45,000

Bills payable 5,000Land 80,000

24,000

1, 95,000 1, 95,000
Centre For Distance Education 9.20 Acharya Nagarjuna University

The Balance Sheets of Sun and Moon and A and B as on 31 st December 2007 were as follows:

Goodwill

Working Notes: X

Capitals transferred 43,044 30,956 61,058 44,142

Capitals in the new firm 40,000 40,000 40,000 40,000
Cash payable or to brought in 3,044 - 9,044 21,058 4,142
Cash at Bank: Balance transferred 23,000

Cash brought in by Y 9,044

32,044

Less: Cash paid to X 3,044

P 21,054
Q 4,142 28,244
3,800

Illustration 6 :
S&M A&B S&M A&B
Capitals : Land & Workshops 50,000 60,000
Sun 50,000 Machinery& Tools 35,000 40,000
Moon 50,000 Furniture& Fixtures 15,000 17,500
A 50,000 Sundry Debtors 30,000 42,500
B 50,000Stock 40,000 50,000
Creditors 75,000 50,000 Cash at Bank 1,500 5,000
Loan 50,000
Outstanding expenses 10,000 15,000
1, 85,000 2, 15,000 1, 85,000 2,15,000
The two firms decided to amalgamate and form in S, M, A & B Co. with effect from 1 st
January 2007. Partners would share equally between themselves as they were doing prior to
amalgamation and they agreed to the following revaluation of assets and liabilities:
Sun & Moon A&B
Land and Workshops 50,000 50,000
Machinery and Tools 35,000 40,000
Furniture and Fixtures 12,500 12,500 Sundry debtors 27,500 35,000

Stock 40,000 40,000

Outstanding expenses 10,000 10,000

Advanced Accounting 9.21 Partnership Accounts III : Amalagamation

In addition to the above it was decided —

i) That the new firm would not take over the loan of A&B which is taken over by the two
partners equally.
ii) That the goodwill of Sun & Moon and A&B was valued at Rs.50, 000 and Rs.25, 000
respectively in the first instance but for the purpose o the Balance Sheet of the new firm
the combined goodwill could be valued at Rs.60,000.

iii) That the reconstructed capitals of partners should be Rs.70, 000 each, introducing cash if
necessary.
You are required to show the profit and loss adj. accounts of amalgamating firms and partners
capital accounts before and after amalgamation and the balance sheet of the new firm.

Solution:
Books of Sun and Moon
P & L Adjustment Account
To Furniture A/c 2,500 By Sun Capital A/C 2,500
To RBD 2,500 By Moon Capital A/C 2,500

5,000 5,000

Sun Capital Account

To P&L Adj. A/C 2,500 By Balance 50,000

To New Firm 72,500 By Goodwill (1/2 of 50,000) 25,000

75,000 75,000

Moon Capital Account

To P&L Adj. A/C 2,500 By Balance 50,000

To New Firm 72,500 By Goodwill (1/2 of 50,000) 25,000
75,000
75,000
Books of A and B
P & L Adj. Account
To Land 14,000By A’s Capital 17,500
To Furniture 5,000 By B’s Capital 17,500
To RBD 7,500
To Stock 10,000
To Outstanding expenses 2,500

35,000 A’s 35,000

Capital Account
Centre For Distance Education 9.22 Acharya Nagarjuna University

To P & L 17,500 By Balance 50,000

To New Firm 70,000 By Goodwill 12,500
By Loan (not taken over) 25,000
87,500
87,500 B’s
Capital Account

To P & L Adj. A/C 17,500By Balance 50,000

To New Firm 70,000 By Goodwill 12,500
By Loan (not taken over) 25,000
87,500 87,500

Books of New Firm

Balance Sheet of New Firm as on 1-1-2007

Liabilities Assets
Capitals: Land and Workshops 1,00,000
Sun 70,000 Machinery 75,000
Moon 70,000 Furniture 25,000
A 70,000 Debtors 72,500
B 70,000 Less: Provision10, 000 62,500
Creditors 1,25,000 Stock 80,000
Outstanding expenses 27,500 Goodwill 60,000
Cash (see working notes) 30,000
4, 32,500 4, 32,500
Working Notes:
Goodwill transferred from old firm 50,000+25,000 75000
Less: Goodwill to be shown in the Balance Sheet 60,000

Goodwill to be written off from Capital Accounts 15,000

Sun Moon A B
Capital transferred to New Firm 72,500 72,500 70,000 70,000
Less: Goodwill share (15,000 x ¼) 3,750 3,750 3,750 3,750
68,750 68,750 66,250 66,250

Cash to be brought in 1,250 1,250 3,750 3,750

Capital of the partners in the New Firm 70,000 70,000 70,000 70,000
Debtors:
Transferred from old firm 30,000 + 42,500 72,500
Advanced Accounting 9.23 Partnership Accounts III : Amalagamation

Less RBD transferred 2,500 + 7,500 10,000

62,500
Cash Balance:
Balance transferred from old firms 15,000 + 5,000 20,000
Add: Cash brought in by the partners 10,000
30,000

9.4 TRY YOURSELF :

1. A and B who are in partnership sharing profits and losses in the proportion of three-fifths andtwo-
fifths respectively, decided to admit into partnership C who is trading alone in the same line. Their
Balance Sheets on the 31st December, 2006 are as follows:
Liabilities A&B C Assets A&B C
A’s Capital Account 1, 05,000 Cash 20,000 10,000
B’s Capital Account 70,000 Book debts 65,000 2,500
C’s Capital Account 20,000Machinery 35,000 —
Creditors 15,000 7,500 Stock 70,000 15,000
Reserve 10,000
2, 00,000 7,500 2, 00,000 27,500
It is decided that C should be given a quarter share in the new firm, A and B sharing the
balance in the old proportion. It is also agreed that C’s assets and liabilities were to be taken over as
per his balance sheet, but the following adjustments were to be made in A and B’s balance sheet:

a) Debtors to be written off by Rs.15, 000.

b) Stocks to be written off by Rs.15, 000.
c) Machinery to be written off by Rs.5, 000.
C also agrees to pay privately to A and B by way of goodwill quarter share of A and B’s
profits for the last two years which were 2005 – Rs.27, 000; 2006 –Rs.33, 000. It was also decided
that the partners’ capitals in the new business shall be in the same proportion as they share profits.
Draw up the new firm’s Balance Sheet as at 1st January 2007 and state a) the total cost to C
for his share in the business, b) how much A and B will each receive for goodwill.
(A’s Capital: Rs.76, 500; B’s Capital: Rs.51, 000; C’s Capital: Rs.42, 500; Total of Balance Sheet
Rs.1, 92,500; C pays Rs.9, 000 to A and Rs.6, 000 to B as goodwill)
2. Singh and Khan have each been carrying on business as general merchants. They decideto
amalgamate, and, henceforth, trade under the name of Singh & Khan, on the following terms:
1) Each partner shall have fixed capital of Rs.10, 000.
2) Singh’s stock is to be brought in at Rs.3, 200 and Khan‘s at Rs.2, 700.
3) Provisions for bad debts are to be increased to 6 per cent on the debtors.
4) Khan’s furniture is not to be taken over while Singh’s furniture is to be taken atRs.450.
5) Singh is to pay the loan from his son before amalgamation.
Centre For Distance Education 9.24 Acharya Nagarjuna University

6) Any deficiency on the net assets brought in it’s to be paid into the firm’s bankerswhile any
excess is to be withdrawn.
The Balance Sheets of Singh and Khan as on 31st December, 2007.
Liabilities Singh Khan Assets Singh Khan
Creditors 1,200 2,100 Furniture and Fixtures 350 200
Loan from his son 600 — Machinery 5,000 5,500
Capital 10,635 10,100 Stock in trade 3,400 2,800
Debtors 2,750 3,025
Less: Provision 120 2,630 125 2,900
Cash at Bank 1,055 800
12,435 12,200 12,435 12,200
Give journal entries necessary to adjust each trader’s books prior to amalgamation and the
opening balance sheet of Singh and Khan.
(Khan pays: Rs.257; Singh receives: Rs.1, 090; Total of Balance Sheet: Rs.23, 300)
3. Two partnership firms, carrying on business under the styles of Black & Co. and White & Co.
respectively, decide to amalgamate into Grey & Co. with effect from 1 st April, 2007. The Balance
Sheets are as follows:

Liabilities Black & Co. White & Co. Assets Black & Co. White & Co
B’s Capital 19,000 Plant and Machinery 10,000
X’s Capital 10,000 Stock in trade 20,000 5,000
Y’s Capital 2,000 Sundry debtors 10,000 10,000
Sundry Creditors10, 000 28,000 A’s Capital 4,000
Bank overdraft 15,000 Cash in hand 6,000
Cash at bank 9,000
Goodwill 10,000
44,000 40,000 44,000 40,000
The following further information is given:
i) Goodwill of Black & Co. is to be valued on the basis of 3 years’ purchase of the average profits
for 3 years in excess of 10% of the total assets of the firm, the total assets being taken as on 31st March
2007 and the profits for the three preceding years were:

2004-05 Rs.11, 000 (after a credit of Rs.3, 000 in respect of claims raised in 2002-03)
2005-06 Rs.6, 000
2006-07 Rs.12, 000 (after a debit of Rs.1, 000 for loss by theft)
ii) X brings in Rs.8, 750 and Y Rs.16, 750 as fresh capital into the new firm but otherwise they
will be deemed to have contributed capitals in proportion to their share in profits, taking the capitals
and A and B in total as the base.
iii) A and B will bring or take cash to make their capitals in the profit sharing ratio .iv) Goodwill
will not remain in the books of Grey & Co.
Advanced Accounting 9.25 Partnership Accounts III : Amalagamation

v) Black & Co owes Rs.5, 000 to White & Co.

vi)Stock of Black & Co. includes Rs.10, 000 worth goods purchased from White & Co. whose practice
is to sell goods at a margin of 25%.
vii) The two pairs of partners as between themselves will share profits in the ratio of 3:5 but the old
profit-sharing ratios amongst the partners will remain undisturbed. viii) B will make a gift of Rs.5,
000 to A towards his capital.
Prepare journal entries for White & Co. and the Balance Sheet of Grey & Co.
(Total of the balance sheet: Rs.71, 500)
4. A and B carry on independent business in provisions and their positions as at 30 th September, 2007
are reflected in the Balance Sheets given below:
Liabilities A B Assets A B

Creditors 1, 10,000 47,000 Stock in trade 1, 70,000 98,000

Payable expense 750 2,000 Sundry debtors 89,000 37,000

Bills payable 12,500 —— Cash at Bank 13,000 7,500

Capital Account 1, 53,000 95,500 Cash in hand 987

234 Furniture 2,750 1,766

Investments 513 —

2, 76,250 1, 44,500 2, 76,250 1, 44,500

Both of them want to form a partnership firm form 1 October, 2007 on the following
understanding:

a) The capital of the partnership would be Rs. 3 lakhs which would be contributed by them in
the ratio 2:1.
b) The assets of the individual businesses would be evaluated by C at which the contribution
due by A and B.
c) C gave his valuation report as follows: Business of A: Stock in trade to be written down by
15% and a portion of Sundry debtors amounting to Rs.9, 000 estimated unrealizable not to
be assumed by a firm; furniture to be valued at Rs.2, 000 and investments to be taken at
market value of Rs.1, 000.
Centre For Distance Education 9.26 Acharya Nagarjuna University

Assets of B: Stocks to written up by 10% and sundry debtors to be admitted at 85% of their
value; rest of the assets to be assumed at their book value.
d) The firm is not to assume any creditors other than the dues on account of purchases made.
Prepare the opening Balance Sheet of the firm.
(A introduces Rs.8, 513 and B withdraws Rs.1, 750; Balance Sheet: Rs.4, 58, 750)

9.5 SUMMARY :
Two partnership firms amalgamate themselves to reap economies and to avoid unnecessary
competition between them. The assets and liabilities of the firms are revalued and capital accounts of
the partners are adjusted accordingly after preparing profit and loss adjustment account. Closing the
old firms, new balance sheet of the new firm is prepared and new capital accounts are opened.

9.6 GLOSSARY :
Amalgamation: Merging of two partnership firms into one single new firm is called amalgamation.

9.7 SELF ASSESSMENT QUESTIONS :

1. How amalgamation takes place in partnership?

2. And what is the procedure adopted while it is taking place?

Dr. R. Jayaprakash Reddy.

 LESSON - 10
PARTNERSHIP ACCOUNTS IV – DISSOLUTION OF A
PARTNERSHIP FIRM
OBJECTIVES :
After going through the lesson you will be able to understand the following:
1. Dissolution of partnership firm and partnership.
2. Modes of dissolution.
3. Accounting procedure for dissolution.
4. Selling a partnership firm to a company.

STRUCTURE OF THE LESSON :

10.1 Dissolution of Partnership firm – Introduction
10.2 Dissolution of Partnership and Partnership firm
10.3 Modes of dissolution of a Partnership Firm
10.4 Accounting Entries
10.5 Sale to a Company
10.6 Illustrations
10.7 Try yourself
10.8 Summary
10.9 Glossary
10.10 Self Assessment Questions

10.1 DISSOLUTION OF PARTNERSHIP FIRM – INTRODUCTION :

In the foregoing lessons we have studied about partnership accounts relating to admission and
retirement or death. In this lesson let us know about dissolution. Dissolution is nothing but closing
down the business which is running at present. The existing partner ceased to do business and apart
after taking their shares and thus the existing business with its present shape comes to an end. When
there is a change in the partnership deed i.e. admission of a new partner or retirement or death of a
partner, it is also a kind of dissolution. Closing the firm totally is no doubt dissolution. Selling a
partnership firm to a company is also dissolution. Let us discuss all these aspects in this lesson.

10.2 DISSOLUTION OF PARTNERSHIP AND PARTNERSHIP FIRM :

Any change in the relations of the partners is called dissolution of partnership. Thus, in all
those cases where a partnership is reconstituted, there is dissolution of the partnership. For example,
in case there is a partnership between X and Y, and a new partner Z is admitted, the partnership between
X and Y comes to an end and a new partnership between X, Y and Z comes into existence. Hence, in
dissolution of the partnership, the firm continues in a reconstituted form. Similarly, a retirement or
death of a partner also leads to reconstitution of the partnership.

The dissolution of partnership among all the partners of a firm is called the dissolution of the
firm. In this case, the business of the firm is closed down and its affairs are wound up. The assets are
Centre For Distance Education 10.2 Acharya Nagarjuna University

realized and the liabilities are paid off. The dissolution of a partnership may or may not result in the
dissolution of a firm but the dissolution of a firm will necessarily result in the dissolution of the
partnership.

10.3 MODES OF DISSOLUTION OF A PARTNERSHIP FIRM :

Partnership firm may be dissolved voluntarily or with the intervention of the court. Here in
this lesson, we consider only voluntary dissolution. This dissolution may take place in any of the
following ways:

1. Dissolution by agreement: A partnership firm comes into existence by mutual agreement and,
therefore, it can be dissolved by the mutual consent of all the partners.

2. Compulsory dissolution: In the following cases a partnership firm will have to be compulsorily
dissolved:

a) by the adjudication of all the partners or of all the partners but one as insolvent, or
b) by the business of firm becoming unlawful due to the happening of any such event.
3. Dissolution on the happening of certain contingencies: In the absence of any contract to the
contrary, a firm will be dissolved on the happening of the following contingencies:
a) on the expiry of the fixed period for which the firm was constituted,
b) on the completion of the adventure or undertaking for the carrying out of which the firm
was constituted.
c) on the death of a partner; and
d) on the adjudication of a partner as insolvent.
4. Dissolution by notice: When a partnership is at will, the firm may be dissolved by any partner
giving a notice in writing to all the other partners of his intention to dissolve the firm. The firm
will be taken to be dissolved from the date as specified in the notice, or if no date is mentioned
from the date of the communication of the notice to the last of the partners.

In this lesson, only voluntary and mutual agreed dissolution related problems are discussed. At
the time of dissolution, a realization account is prepared and all assets and liabilities are sold and paid
off and the result of realization will be transferred to the capital accounts of the partners and finally, the
partners’ accounts are also be closed down. When partners take assets or responsibility of liabilities
their capital accounts are adjusted accordingly.

10.4 ACCOUNTING ENTRIES :

In the event of dissolution of a partnership firm, all its assets are sold away and liabilities paid
off. A Realisation Account is opened in order to find out any profit or loss on realization of assets and
making payment of liabilities.

Journal Entries :
1. For transfer of assets to Realisation Account:
Realisation A/C Dr
To Sundry Assets A/C
 Advanced Accounting 10.3 Partnership Account IV-Dissplution
of a partnership firm

It is to be noted that when an asset is transferred to the Realisation Account, its corresponding
provision or reserve appearing on the liabilities side of the balance sheet, will also be transferred to the
Realisation Account. For example, Investments and Joint Life Insurance Policy appear on the assets
side of the balance sheet while Investments Fluctuation Fund and Joint Life Insurance Policy Reserve
appear on the liabilities side of the balance sheet. The accounting entries in the event of dissolution of
the firm would be as follows:

a) Realisation A/C Dr
To Investments A/C
To Joint Life Insurance Policy A/C
b) Investments Fluctuation Fund A/C Dr
Joint Life Insurance Policy Reserve A/C Dr
To Realisation A/C
2. For transfer of liabilities to Realisation Account:
Liabilities A/C Dr
To Realisation A/C
All liabilities excluding partners’ loans will be transferred at book values. Each liability should
debit individually. This will close accounts of all liabilities transferred.
3. For Realisation of assets:
Cash/Bank A/C Dr
To Realisation A/C
4. For payment of liabilities:
Realisation A/C Dr
To Cash/Bank A/C
5. In case a partner takes an asset:
Partner’s Capital A/C Dr
To Realisation A/C
6. In case a partner agrees to meet a liability:
Realisation A/C Dr
To Partner’s Capital A/C
7. For expenses on Realisation:
Realisation A/C Dr
To Cash/Bank
8. For profit on Realisation:
Realisation A/C Dr
To Partners’ Capital A/Cs
9. For paying off partner’s loan:
Partner’s Loan A/C Dr
To Bank A/C
Centre For Distance Education 10.4 Acharya Nagarjuna University

10. For distribution of reserves, undistributed profits etc.

P & L A/C Dr
Reserve A/C Dr
To Partners’ Capital A/Cs
11. For cash brought in by a partner on account of his account showing a debit balance:
Cash/Bank A/C Dr
To Partner’s Capital A/C
12. The credit balance in a partner’s capital account will be paid off:
Partner’s Capital A/C Dr
To Cash/Bank A/C

10.5 SALE TO A COMPANY :

Often, a partnership firm converts itself into a joint stock limited company or sells its business
to an existing one. Broadly, the procedure already discussed above will be followed for closing the
books of the firm. Realization Account will be opened and assets transferred to it, so also liabilities as
per the agreement reached with the company. Whatever the company pays as purchase consideration
will be credited to the Realisation Account. If expenses are incurred by the firm, the amount will be
debited to Realisation Account. If the creditors are taken over by the company, no further treatment is
necessary except transferring them to Realisation Account. But if the creditors are to be paid by the
firm, the actual amount paid to them will be debited to liability account concerned; the difference
between the book figure and the amount actually paid should be transferred to the Realisation Account.
The profit or loss on realization will be transferred to the capital accounts in the profit-sharing ratio.

Usually, the company takes over all the assets including cash. Therefore, cash should also be
transferred to Realisation Account. Otherwise, it will not be transferred. Normally, the company will
discharge the amount due from it in the form of cash, debentures and shares. Separate accounts will be
opened for debentures and shares received. Partners will divide the debentures and shares among
themselves, in absence of an express agreement, in the ratio of their final claims, that is to say, in the
ratio of capitals standing after the loss or profit on realization has been transferred. Further, since no
fraction of a share or debenture can be issued, the nearest whole number being made in cash. If there
is an agreement to divide the shares or debentures in a particular manner, the agreement should be
followed.

It is to be noted that if there is some valueless assets in the books of the firm and if this has to
be divided among the partners, it should be divided in the profit-sharing ratio so that any ultimate profit
or loss may correspond to the ratio in which profits are shared.

10.6 ILLUSTRATIONS :
Illustration 1 :
The Balance Sheet of a firm showed the following position as on 31 st December, 2007.
Liabilities Assets
Partners Capitals: Buildings 40,000
D 25,000 Investments 10,000
 Advanced Accounting 10.5 Partnership Account IV-Dissplution
of a partnership firm

E 20,000 Debtors 5,000

F 15,000 60,000 Bank Balance 15,000
Sundry Creditors 10,000
70,000 70,000
The partnership was dissolved on 31-12-2007. Creditors were paid at 5% discount. D agreed
to take over buildings at Rs.45, 000, E took over investments at Rs, 26,000 and F took debtors at Rs.3,
000.

Show necessary accounts in the firm’s books.

Solution:
Realisation Account
To Buildings 40,000By Creditors 10,000
To Investments 10,000 By D’s Capital – Buildings 45,000
To Debtors 5,000 E’s Capital – Investments 26,000
To Cash – Creditors 9,500F’s Capital – Debtors 3,000
To D’s Capital – profit 6,500
To E’s Capital – profit 6,500
To F’s Capital – profit 6,500 19,500
84,000 D’s 84,000
Capital Account

To RealisationA/C 45,000By Balance B/D 25,000

By Realisation A/C 6,500
By Cash 13,500
45,000
45,000 E’s
Capital Account

To Realisation A/C 26,000By Balance B/D 20,000

By Realisation A/C 6,500
26,500
26,500 F’s
Capital Accounts

To Realisation A/C 3,000By Balance B/D 15,000

To Cash 18,500By Realisation A/C 6,500

21,500 21,500

Cash Account

To Balance B/D 15,000By Realisation A/C 9,500

Centre For Distance Education 10.6 Acharya Nagarjuna University

To D’s Capital 13,500By E’s Capital A/C 500

By F’s Capital A/C 18,500
28,500 28,500
Illustration 2:
The following was the Balance Sheet of Raja and Sudhir as on 31 st December, 2007.
Liabilities Assets
Sundry Creditors 38,000Cash at Bank 11,500
Mrs. Raja’s Loan 10,000 Stock in trade 6,000
Sudhir’s Loan 15,000 Sundry Debtors 20,000
Reserve Fund 5,000Less: Provisions 1,000 19,000
Raja’s Capital 10,000Furniture & Fittings 4,000
Sudhir’s Capital 8,000Machinery and Plant 28,000
Investments 10,000
Profit and Loss Account 7,500
86,000 86,000
The firm was dissolved on 31st December, 2007 and the following was the result:

a) Raja took over investments, at an agreed value of Rs.8, 000 and agreed to pay of the loan of
Mrs. Raja.

b) The assets realized the following:

Stock 5,000 Machinery and Plant 25,500

Expenses 1,100 Furniture & Fittings 4,500

Debtors 18,000
c) The Sundry Creditors were paid off less 2 ½ % discount. Raja and Sudhir shared profits and
losses in the ratio of 3:2. Journalise the entries to be made on the dissolution and show
Realisation Account, Cash Account, and Partners’ Capital Accounts.

Solution:
Journal Entries:
1. Realisation A/C Dr 68,000

To Stock 6,000

To Debtors 20,000

To Furniture & Fixtures 4,000

To Machinery 28,000

To Investments 10,000
(Being assets transferred to Realisation account)
 Advanced Accounting 10.7 Partnership Account IV-Dissplution
of a partnership firm

2. Bad debts Reserve A/C Dr 10,000

Creditors A/C Dr 38,000
Mrs. Raja’s loan A/C Dr 10,000
To Realisation A/C 49,000
(Being liabilities transferred to Realisation account)
3. Raja’s Capital A/C Dr 8,000

To Realisation A/C 8,000

(Being investments taken over by Raja)
4. Realisation A/C Dr 10,000

To Raja’s Capital A/C 10,000

(Being the risk of payment for liability of Mrs. Raja taken over by Raja)
5. Cash A/C Dr 53,000
53,000
To Realisation A/C
(Being the assets realized)

6. Realisation A/C Dr 1,100

To Cash 1,100

(Being realization expenses paid)

7. Realisation A/C Dr 37,050

To Cash 37,050

(Being liabilities paid)

8. Reserve Fund A/C Dr 5,000

To Raja Capital 3,000

To Sudhir Capital 2,000

(Being reserve fund distributed)

9. Raja Capital A/C Dr 4,500

Sudhir Capital A/C Dr 3,000

To Profit and Loss A/C 7,500

(Being loss distributed)

10. Sudhir Loan A/C Dr 15,000

To Cash 15,000

(Being Sudhir’s loan paid)

Realisation Account
Centre For Distance Education 10.8 Acharya Nagarjuna University

To Sundry Assets 68,000By Sundry Liabilities 49,000

To Raja Capital 10,000By Raja Capital 8,000
To Cash – expenses 1,100By Cash – Assets 53,000
To Cash – liabilities 37,050 By Raja Capital – loss 3,690
By Sudhir Capital – loss 2,460
1,16,150 1,16,150
Raja Capital Account
To Profit and Loss A/C 4,500By Balance B/D 10,000
To Realisation A/C 8,000 By Reserve fund 3,000
To Realisation A/C – loss 3,690 By Realisation 10,000
To Cash A/C 6,810
23,000 23,000

Sudhir Capital Account

To Profit and Loss A/C 3,000By Balance B/D 8,000
To Realisation A/C – loss 2,460By Reserve fund 2,000
To Cash 4,540
10,000
10,000
Cash Account

To Balance B/D 11,500 By Realisation A/C 1,100

To Realisation A/C 53,000By Realisation A/C 37,050
By Sudhir’s Loan 15,000
By Raja Capital 6,810
By Sudhir Capital 4,540
64,500 64,500

Illustration 3 :
A, B and C commenced business on 1st January 2006, with capitals of Rs.50,000, Rs.40,000
and Rs.30,000. Profits and losses were shared in the ratio of 4:3:3 capitals carried interest at 5% per
annum. During 2006, and 2007, they made profits of Rs.20, 000, and Rs.25, 000 (before allowing
interest). Drawings of each partner were Rs.5, 000 per year.
On 31st December 2007, the firm was dissolved. Creditors on that date were Rs.12, 000. The
assets realized Rs.1, 30,000 net. Give necessary accounts to close the books of the firm.

Solution :
Balance Sheet of the firm as on 31-12-2007
Liabilities Assets
Creditors 12,000Sundry Assets 1, 47,000
 Advanced Accounting 10.9 Partnership Account IV-Dissplution
of a partnership firm

Joint Capital (A, B & C) (Bal. Fig)

On 1-1-2006 1, 20,000
Add: 2 years’ profits 45,000
1, 65,000
Less: 2 years’ drawings 30,000 1, 35,000
1, 47,000 1,47,000
Which means Rs.1, 47,000 worth of assets was realized Rs.1, 30,000.
To ascertain the capital of each partner, capital accounts should be prepared for 2006 and 2007.
A’s Capital Account
To Drawings 5,000 1-1-2006 By Cash 50,000 31-12-2006 To Balance

C/D 53,100 31-12-2006By Interest 2,500

By P & L A/C 5,600

58,100 58,100
To Drawings 5,000 1-1-2007 By Balance B/D 53,100 31-12-2007 To Realisation

A/C 6,800 31-12-2007 By Interest 2,655

By P & L A/C 7,500

63,255 63,255

B’s Capital Account

To Drawings 5,0001-1-2006 By Cash 40,000 31-12-2006 To

Balance C/D 41,200 31-12-2006 By Interest 2,000

By P & L A/C 4,200

46,200 46,200

To Drawings 5,0001-1-2007 By Balance B/D 41,200

31-12-2007 To Realisation A/C 5,100 31-12-2007 By Interest 2,060
To Cash 38,785 By P & L A/C 5,625
48,885 48,885
C’s Capital Account
To Drawings 5,000 1-1-2006 By Cash 30,000
31-12-2006 To Balance C/D 30,700 31-12-2006By Interest 1,500
By P & L A/C 4,200
35,700 35,700
To Drawings 5,000 1-1-2006 By Balance B/D 30,700
Centre For Distance Education 10.10 Acharya Nagarjuna University

31-12-2007 To Realisation A/C 5,100 31-12-2007By Interest 1,535

To Cash 27,760 By P & L A/C 5,625

37,860 37,860
Realisation Account
To Sundry Assets 1,47,000 By Creditors 12,000
By Cash – Assets 1,30,000
To Cash – Creditors 12,000 By A’s Capital 6,800
By B’s Capital 5,100
By C’s Capital 17,000
1,59,000
1,59,000
Cash Account

To Realisation A/C - 1,30,000 By Realisation A/C - 12,000

(Assets realized) ( Creditors paid)
By A’s Capital 51,455
By B’s Capital 38,785
By C’s Capital 27,760
1,30,000 1,30,000
Illustration 4 :
A, B and C decided to dissolve their partnership on 30th June, 2007. Their Balance Sheet is as
follows:
Liabilities Assets

Creditors 3,400 Cash at Bank 2,500

Capitals: Debtors 6,200

A 12,000 Stock 3,700

B 9,000 Loose Tools 800

C 6,000 Plant and Machinery 6,000

Freehold premises 10,000

30,400 30,400
B and C agreed to form a new partnership to carry on the business and it is agreed that they
shall acquire from the old firm the following assets at figures shown below:
Stock 4,000
Loose Tools 500
Motor Vehicles 2,500
 Advanced Accounting 10.11 Partnership Account IV-Dissplution
of a partnership firm

Plant and Machinery 7,800

Freehold premises 8,400
Goodwill 6,000
The partnership agreement of A, B and C provide that trading profit and loss shall be divided
in the ratio of 3:2:1 and that capital profits or losses shall be divided in proportion of their respective
capitals.

Debtors realize Rs.5, 900 and discounts amounting to Rs.72 are secured on payments due to
creditors.
Prepare the necessary accounts of A, B and C giving effect to these transaction and draw up
the opening Balance Sheet of B and C bring the necessary cash to pay A in the ratio of 3:2.

Solution:
Realisation Account
To Debtors 6,200By Creditors 3,400
To Stock 3,700 By B & C Joint Account:
To Loose Tools 800 Stock 4,000
To Motor Vehicles 1,200 Loose Tools 500
To Plant and Machinery 6,000 Vehicles 2,500
To Freehold Premises 10,000 Plant 7,800
To Cash – Creditors (3,400-72) 3,328 Freehold 8,400
To A’s Capital 3,236 Goodwill 6,000 29,200
To B’s Capital 2,424 By Cash – debtors 5,900
To C’s Capital 1,612 7,272
38,500 38,500
The profit realized on Stock, Bills receivable, Bills payable and Creditors is revenue profit or
trading profit.
The profit realized on other fixed assets is capital profit.
Profit on Stock 300
Profit on Creditors 72
372
Loss on debtors 300
Trading profit or Revenue profit 72
A’s Share 72 x ½ = 36
B’s Share 72 x 1/3 = 24
C’s Share 72 x 1/6 = 12
Centre For Distance Education 10.12 Acharya Nagarjuna University

Total Profit on realization 7,272 Less:

Trading Profit 72
Capital Profit 7,200
A’s Share 7,200 x 4/9 = 3,200
B’s Share 7,200 x 3/9 = 2,400
C’s Share 7,200 x 2/9 = 1,600
Total Profit to A 3,200 + 36 = 3,236
Total Profit to B 2,400 + 24 = 2,424
Total Profit to C 1,600 + 12 = 1,612
B & C Joint Account
To Realisation A/C 29,200By B’s Capital A/C 17,523
By C’s Capital A/C 11,677
29,200 29,200
Cash Account
To Balance 2,500 By Realisation – Creditors 3,328
To Realisation – Debtors 5,900By A’s Capital 15,236
To B’s Capital 6,099
To C’s Capital 4,065
18,564 A’s 18,564
Capital Account

To Cash – payment 15,236By Balance 12,000

By Realisation 3,236
15,236
15,236 B’s
Capital Account

To B & C Joint A/C 17,523By Balance 9,000

By Realisation 2,424
By Cash 6,099
17,523
17,523 C’s
Capital Account

To B & C Joint A/C 11,677 By Balance 6,000

By Realisation 1,612
By Cash 4,065

11,677 11,677

Books of New Firm

Balance Sheet of B & C
 Advanced Accounting 10.13 Partnership Account IV-Dissplution
of a partnership firm

Liabilities Assets
Capitals: Stock 4,000
B 17,523Loose Tools 500
C 11,677 Motor Vehicles 2,500
Plant and Machinery 7,800
Freehold Premises 8,400
Goodwill 6,000
29,200 29,200
Working Notes:
Cash available as per Balance Sheet 2,500 Add: Realisation on

Debtors5,900

8,400

Less: Payment to creditors 3,328 Cash available to pay to A 5,072

Cash required to pay to A 15,236

Cash brought by B & C in the ratio of 3:2 10,164

B = 10,164 x 3/5 = 6,099
C= 10,164 x 2/5 = 4,065

Illustration 5 :
Rao, Gopi and Krishna are partners of a firm of Chartered Accountants having office at Nagpur,
Pune and Goa, sharing profits and losses in the ratio of 5:3:2 respectively. The statement of affairs of
the firm as at 31st March, 2007 is shown below:

Capital Accounts:
Rao 1,50,000

Gopi 1,20,000

Krishna 60,000
Current Accounts:
Rao 75,500

Gopi 25,750

Krishna 11,150 Accounts payable

49,150

Accounts receivable:
Nagpur 1,20,000
Centre For Distance Education 10.14 Acharya Nagarjuna University

Pune 86,250

Goa 98,750

Goodwill 50,000

Cash in hand 5,750

Cash with bank 57,000

On that date, Rao desires to retire from the firm and other two partners agree and it is decided
that Gopi would take over the Nagpur and Pune offices and Krishna would take over the Goa office
with respective assets and liabilities. You are given the following additional information:

a) Rao’s share of goodwill is valued at Rs.1,50,000 and this would be brought by Gopi and
Krishna in their profit sharing ratios.

b) Accounts payable include rent of the Goa office for the months of February and March2007 at
the monthly rate of Rs.2,500 and the balance represents outstanding expenses of Nagpur and
Pune offices.
c) Cash in hand is to be utilized to pay Rao and other settlements to take place before 1st May,
2007.

d) Accounts receivable to be discounted by 2%.

Draw up the necessary accounts to give effect to the above and also the books of the firm.
Solution:
Realisation Account
To Accounts receivable A/C: By Accounts payable 49,150
Nagpur 1,20,000By Gopi’s Capital A/C 2,02,125
Pune 86,250 (Assets taken)
Goa 98,750 By Krishna’s Capital A/C 96,775
To Gopi’s Capital A/C 44,150 By Gopi’s Capital A/C – loss 16,830
To Krishna ‘s Capital A/C 5,000 By Krishna’s Capital A/C – loss 11,200
Goodwill 50,000 By Rao’s Capital A/C – loss 28,050
4, 04,150 4, 04,150
Rao’s Capital Account
To Realisation A/c 28,050 By Balance 1,50,000
To Cash – payment 3,47,450 By Current A/C – transfer 75,500
By Gopi’s Capital – goodwill 90,000 By
Krishna’s Capital – goodwill 60,000

3,75,500 3,75,500
Gopi’s Capital Account
To Current A/C – transfer 25,750 By Balance 1,20,000
 Advanced Accounting 10.15 Partnership Account IV-Dissplution
of a partnership firm

To Realisation – loss 16,830 By Realisation – liability 44,150

To Realisation – assets taken 2,02,125 By Cash – introduced 1,70,555

3,34,705 3,34,705
Krishna’s Capital Account
To Current A/C – transfer 11,150 By Balance 60,000
To Realisation – loss 11,220 By Realisation – liability 5,000
To Realisation – assets taken 96,775 By Cash – introduced 1,14,195
1,79,145 Cash 1,79,145
Account

To Balance : Bank 57,000 By Rao’s Capital 3,47,450

Cash 5,750
To Gopi’s Capital 1,70,555
To Krishna’s Capital 1,14,145
3,47,450 3,47,450
Working Notes:
Assets taken over by partners:
Gopi Krishna

(Nagpur and Pune offices) (Goa office)

Accounts receivable (1,20,000 + 86,250) 2,06,250 98,750

Less: 2% discount 4,125 1,975

Net value of Assets taken over (to be debited to
Capitals and creditors to Realisation A/C) 2, 02,125 96,775
Liabilities:
Accounts payable 49,150

Less; 2 months rent of Goa office @ 2,500 per month 5,000

Liabilities of Nagpur and Pune offices 44,150

That is liabilities taken over by Gopi: Rs.44, 150 (to be credited capital and debited to Realisation
Account0
Liabilities taken over by Krishna Rs.5, 000.
Goodwill : The balance appearing in the Trial Balance is to be transferred to Realisation account to
write off it, and Rao’s share of Goodwill is credited him and debited to Gopi and Krishna in their profit
sharing ratio.

Cash : Gopi and Krishna brought cash as their capital accounts shown debit balance. The existing cash
balance and the amount brought in by Gopi and Krishan is utilized to pay off Rao’s claim.
Centre For Distance Education 10.16 Acharya Nagarjuna University

Current Accounts: The balance in Current Accounts is transferred to respective sides of Capital
Accounts and all the adjustments wee carried out through Capital Accounts.
Sale to a company :
Illustration 6 :
The Balance Sheet of Young and Active sharing 5/8 and 3/8 respectively stood as follows,
when they determined to sell of their business to a newly started Joint Stock Company:
Liabilities Assets
Young Capital 60,000Machinery 32,000
Active Capital 36,000 Debtors 20,000
Reserve 8,000 Stock 64,000
Creditors 16,000Cash 4,000
1, 20,000 1, 20,000
The company takes over all the assets except cash for Rs.1, 20,000 of which Rs.80, 000 payable
in shares of the company and Rs.40, 000 in cash. The expenses of realization amounted to Rs.720 and
the creditors were paid off at 5% discount.

Pass journal entries and open realization, cash and capital accounts in the books of the firm.
Solution :
Journal Entries :
1. Realisation A/C Dr 1,16,000
To Machinery 32,000
To Debtors 20,000

To Stock 64,000

(Being assets transferred to realization account)

2. Creditors A/C Dr 16,000

To Realisation 16,000

(Being creditors transferred to realization accounts)

3. Company A/C Dr 1,20,000

To Realisation 1,20,000
(Being the assets sold)
4. Cash A/C Dr 40,000
Shares A/C Dr 80,000
To Company 1,20,000
(Being the purchase consideration received)
5. Realisation A/C Dr 720
To Cash 720

(Being expenses paid)

 Advanced Accounting 10.17 Partnership Account IV-Dissplution
of a partnership firm

6. Realisation A/C Dr 15,200

To Cash 15,200
(Being creditors paid with 5% discount)
7. Reserve A/C Dr 8,000
To Young’s Capital 5,000
3,000
To Active’s Capital
(Being Reserve distributed)

8. Realisation A/C Dr 4,080

To Young’s Capital 2,550

To Active’s Capital 1,530

(Being profit on realization distributed)

9. Young’s Capital A/C Dr 50,000

Active’s Capital A/C Dr 30,000
To Shares 80,000
(Being shares distributed in the final capital ratio)
10. Young’s Capital A/C Dr 17,550

Active’s Capital A/C Dr 10,530

To Cash 28,080
(Being final settlement made)
Realisation Account
To Machinery 32,000By Creditors 16,000

To Debtors 20,000By Company 1,20,000

To Stock 64,000

To Cash – expenses 720 To Cash –

creditors 15,200

To Young’s Capital 2,550

To Active’s Capital 1,530 4,080

1,36,000 1,36,000

Cash Account

To Balance B/D 4,000By Realisation A/C 720

To Company A/C 40,000 By Realisation A/C 15,200
By Young’s Capital 7,500
Centre For Distance Education 10.18 Acharya Nagarjuna University

By Active’s Capital 10,530 28,080

44,000 44,000

Shares Account

To Company A/C 80,000By Young’s Capital 50,000

By Active Capital 30,000

80,000 80,000

Young’s Capital Account

To Shares 50,000By Balance B/D 60,000

To Cash 17,550By Realisation A/C 2,550
By Reserve 5,000

67,550 67,550

Active’s Capital Account

To Shares 30,000 By Balance B/D 36,000

To Cash 10,530By Realisation A/C 1,530
By Reserve 3,000
40,530 40,530
Working Notes:
Final Capital Ratio: 67,550: 40,530
5: 3
Note: shares should be distributed first in the final capital ratio.
Illustration 7 :
Ram and Shyam are in partnership sharing profits and losses in the ratio of two-thirds and one-
thirds respectively. Their Balance Sheet as on 31st December 2007, on which date they agreed to
convert their business into a limited company was as follows:

Balance Sheet
Liabilities Assets
Sundry Creditors 30,000Cash 7,000
Mortgage on Freehold premises 10,000Sundry Debtors 26,000
Capitals: Stock 16,000
Ram 20,000 Plant 5,000
Shyam 10,000 30,000Freehold premises 16,000
70,000 70,000
The company takes over all the assets and liabilities with the exception of the mortgage loan
purchase price being Rs.60, 000, payable as to Rs.12, 000 in cash, Rs.24, 000 in debentures and the
balance in equity shares of the company.
 Advanced Accounting 10.19 Partnership Account IV-Dissplution
of a partnership firm

Close the books of the firm after the above transactions have been carried out including the
payment of mortgage. The partners agree to share the debentures and shares in proportion to their
capitals.

Solution :
Purchase Consideration:
In the form of cash 12,000 In the form

of debentures 24,000

In the form of equity shares 24,000

60,000

Realisation Account
To Cash 7,000 By Creditors 30,000
60,000
To Debtors 26,000 By Company A/C
To Stock 16,000 To Plant 5,000

To Freehold premises 16,000

To Ram’s Capital 13,333
To Shyam’s Capital 6,667 20,000

90,000
90,000
Company Accounts

To realization A/C 60,000By Cash 12,000

By Debentures 24,000
By Shares 24,000
60,000 60,000
Mortgage Loan Account
To Cash 10,000By Balance B/D 10,000

10,000 10,000

Cash Account

To Company A/C 12,000By Mortgage Loan 10,000

By Ram’s Capital 1,333
By Shyam’s Capital 667
Centre For Distance Education 10.20 Acharya Nagarjuna University

12,000 12,000

Debentures Account

To Company A/C 24,000By Ram’s Capital 16,000

By Shyam’s Capital 8,000

24,000 24,000

Shares Account

To Company A/C 24,000By Ram’s Capital 16,000

By Shyam’s Capital 8,000

24,000 24,000

Ram’s Capital Account

To Debentures 16,000 By Balance B/D 20,000

To Shares 16,000By Realisation A/C 13,333

To Cash 1,333
33,333 33,333
Shyam’s Capital Account
To Debentures 8,000 By Balance B/D 10,000
To Shares 8,000 By Realisation A/C 6,667
To Cash 667
16,667 16,667
Illustration 8 :
Rao and Reddy carry on business in partnership wished to dissolve the firm and sell off the
business to a limited company on 31st December, 2006, when the firm’s position was as under:
Sundry Creditors 21,250Furniture 3,320
Rao’s Capital 34,000Stock 15,380
Reddy’s Capital 17,000Debtors 48,450
Cash 5,100
72,250 72,250
The arrangement with the limited company was as follows:
a) Furniture and stock were purchased at Balance Sheet values less 10%.
b) Goodwill of the firm was valued at Rs.10, 120.
c) The firm’s debtors, cash and creditors were not to be taken over by the company, but the
company agreed to collect the book debts and discharge the liabilities of the vendors as agent,
for which services the company was to he paid 3% on all collections from the vendors’ debtors
and 2% on cash paid to Vendors’ creditors.
Advanced Accounting 10.21 Partnership Account IV-Dissplution
of a partnership firm

d) The purchase price was to be discharged by the company in fully paid ordinary shares ofRs.100
each at a premium of Rs.10 per share.
The company received during the first two months after the purchase of business Rs.48, 000 from
vendors’ debtors in full satisfaction. The creditors were paid off less Rs.250 allowed by them as
discount. The company paid the balance due to the vendors on March 1, 2007.
Ignore the question of interim distribution of cash write up the realization account, cash account
and the capital accounts of the partners.
Solution:
Purchase Consideration:
Assets taken over:
Furniture 3,320

Less: 10% 332 2,988

Stock 15,380

Less: 10% 1,538 13,842

Goodwill 10,120

Purchase price 26,950

In the form of shares of Rs.110 each
Number of shares: 26,950/110 = 245

Cash collected by the company from debtor on behalf of the firm: 48,000

Less: Cash paid to creditors on behalf of the firm 21,000

27,000
Cash due from the company
Less: Commission 48,000 x 3/100 1,440
21,000 x 2/100 420 1,860
Cash received from the company 25,140
Realisation Account
To Furniture 3,320By Creditors 21,250
To Stock 15,380By Company A/C 26,950
To Debtors 48,450By Company A/C- cash due 25,140

To Rao’s Capital 3,095

To Reddy’s Capital 3,095 6,190
Centre For Distance Education 10.22 Acharya Nagarjuna University

73,340 73,340

Company Account

To Realisation A/C 26,950By Shares – Company 26,950

To Realisation A/C 25,140By Cash 25,140

52,090 52,090

Shares Account

To Company A/C 26,950By Rao’s Capital 17,490

By Reddy’s Capital 9,460
26,950 26,950
Cash Account

To Balance 5,100By Rao’s Capital 19,605

To Company A/C 25,140By Reddy’s Capital 10,635
30,240 30,240
Rao’s Capital Account
To Shares 17,490By Balance B/D 34,000
To Cash 19,605By Realisation A/C 3,095
37,095 37,095
Reddy’s Capital Account
To Shares 9,460By Balance B/D 17,000
To Cash 10,635By Realisation 3,095
20,095 20,095
Note: Shares to be distributed first in the ratio of final claims of the partners =
37,095:20095 = 370: 201 (adjusted)
Shares to Rao = 245 x 371/572 = 17,490
Shares to Reddy = 245 x 201/572 = 9,460
The remaining claim to the partners should be paid in cash.

10.7 TRY YOURSELF :

1. Rahul and Kiran are partners sharing profits as 2:1. The position of the firm as on 31 st December
2007 when they decided to dissolve the business was as follows:

Liabilities Assets
Sundry Creditors 15,000Plant and Machinery 25,000
 Advanced Accounting 10.23 Partnership Account IV-Dissplution
of a partnership firm

General Reserve 10,000Furniture 4,000

Capital Accounts: Stock 10,000
Rahul 22,000 Sundry Debtors 20,000
Kiran 22,000 44,000Cash at Bank 10,000
69,000 69,000
The realization shows the following result:
a) Rahul took over plant and machinery and furniture at book values less 10%.
b) Kiran took over the stock and goodwill at Rs.17, 500
c) Sundry debtors realized Rs.18, 500.
d) Sundry creditors wee settled at a discount of 5%.
Close the books of the firm.
(Rahul gets Rs.5, 134 and Kiran gets Rs.9, 116)
2. Lakshman, Mukund and Mohan sharing profits in the proportion of 3:2:1 agreed upon dissolution
of their partnership on 31st December, 2007 on which date their Balance Sheet was as under:
Liabilities Assets
Capital Accounts: Machinery 60,750
Lakshman 60,000 Stock in trade 11,325
Mukund 30,000 90,000Investments 31,245
Mrs.Lakshman Loan 15,000Joint Life Policy 21,000
Creditors 27,750Debtors 13,950
Life Policy Fund 21,000Less: Provision 900 13,050
Investments fluctuation fund 9,000Current Account – Mohan 17,250
Cash at bank 8,130
1, 62,750 1,62,750
The Life Policy is surrendered for Rs.18, 000. The investments are taken over by Lakshman
for Rs.26, 250. Lakshman agrees to discharge his wife’s loan. Mukund takes over all the stock at
Rs.10, 500 and debtors amounting to Rs.7, 500 at Rs.6, 000. Machinery is sold for Rs.82, 500. The
remaining debtors realize 50% of book value. The expenses of realization amount to Rs.900.

It is found that an investment not recorded in the books is worth Rs.3, 000. The same is taken
over by one of the creditors at this value.

Show the necessary ledger accounts including the final accounts of the partners on completion
of the disillusion of the firm.

(Realisation: Lakshma – Rs.21,353; Mukund – Rs.14,235; Mohan – Rs.7,117; Final settlement:

Lakshman gets Rs.70,103; Mukund gets Rs.27,735; Mohan pays Rs.10,133)
Centre For Distance Education 10.24 Acharya Nagarjuna University

3. P, Q and R carried on business in partnership. On 31st December, 2007, their balance sheet
was as under:
Liabilities Assets
Sundry Creditors 40,500Land and Buildings 36,000
P’s Loan 54,000Plant and Machinery 72,000
Capital Accounts: Loose Plant and Tools 13,500
P 1, 08,000 Stock in trade 90,000
Q 90,000 Sundry debtors 1, 26,000
R 67,500 2, 65,500 Cash at Bank 22,500

3, 60,000 3, 60,000
They decided to dissolve the firm as on 31st December, 2007. Q and R continued the business,
agreeing to purchase P’s share in the capital of the firm in the proportions in which they shared
profits and losses. P agreed to allow his loan to remain in the business. Profits and losses are shared:
P two-fifths, Q two- fifths, and R one-fifths. Q and R utilize the cash at bank to pay P and contribute
the balance.

For the purpose of the dissolution, the following valuations were made:

Goodwill 45,000; Land and Buildings Rs.50,500; Plant and Machinery as in the Balance Sheet,
subject to 10% depreciation; Loose plant and tools as in the Balance Sheet; Stock in trade Rs.81,
000; Sundry Debtors as in the Balance Sheet, subject to Rs.9, 900; Provision for bad debts and an
allowance of 5% for discounts. The liability to sundry creditors is taken over by Q and R subject
to a allowance of Rs.1, 800 for discounts.

Q and R continue to share profits and losses in the same proportion as before. Draw up the
Realisation Account and other necessary accounts in the books of P, Q and R to close the books
and opening Balance Sheet of M/S Q and R together with their opening entries.

(Realisation: P- Rs.7, 758; Q – Rs.7, 758; R – Rs.3, 879; P receives cash Rs.1, 15,758; New firm
total of Balance Sheet Rs.3, 55,095)

4. X, Y and Z carry on business in partnership sharing profits and losses ½, 3/8 and 1/8
respectively. On 31st March, 2007, they agreed to sell their business to a limited company. Their
position on that date was as follows:
Liabilities Assets
X Capital 40,000Freehold property 36,000
Y Capital 30,000Machinery 24,000
Z Capital 26,000Book debts 30,000
Loan on Mortgage 8,000Stock 26,000
Sundry Creditors 16,000Cash 4,000
1, 20,000 1, 20,000
The company took the following assets at the valuation shown below:
Freehold property 44,000 Machinery 22,000
 Advanced Accounting 10.25 Partnership Account IV-Dissplution
of a partnership firm

Book debts 28,000 Stock 24,000

Goodwill 8,000
The company also agreed to pay the creditors which were agreed at Rs.15, 400. The company
paid Rs.67, 000 in fully paid shares of Rs.10 each and the balance in cash. The expenses amounted
to Rs.1, 000.

You are required to prepare Realisation and other related accounts in the books of the firm with
the calculation of purchase consideration)

( Realisation A/C: X – Rs.4, 800; Y – Rs.3, 600; Z – Rs.1, 200; Cash to X – Rs.16, 380; Y – Rs.12,
280; Z – Rs.9, 940; Purchase consideration: Rs.1,10,600;)

5. Rao, Raheman and Robert were partners in a partnership firm sharing profits in ½, 3/8, 1/8
ratio. On 31st December, 2007 they want to sell the firm to a newly established Joint Stock
Company. Their position on the above date was as follows:
Liabilities Assets
Capitals: Freehold Assets 18,000
Rao 20,000 Machinery 12,000
Raheman 15,000 Book debts 15,000
Robert 13,000 48,000 Stock 13,000
Sundry Creditors 12,000

60,000 60,000
Company took the following assets as under:
Freehold Assets Rs.26, 000; Machinery Rs. 10, 000; Book debts Rs.14, 000; Stock Rs.12, 000;
Goodwill Rs.5, 000.

The purchase price of Freehold assets and machinery for Rs.36, 000 are to be paid in the form
of equity shares, the purchase price of book debts, stock and goodwill are to be paid in cash. The
partnership firm paid creditors with 3% discount. Expenses of Realisation amounted to Rs.1, 000.

Pass the necessary journal entries to close the books of the firm and prepare the necessary
ledger accounts to show the result of dissolution and final settlement among the partners.

(Realisation A/C: Rao – Rs.4, 180; Raheman – Rs. 3, 135; Robert – Rs.1, 045; Rao receives – Rs.8,
750 and shares Rs.15, 430; Reheman receives Rs.6, 565 and shares Rs.11, 570; Robert receives Rs.5,
045 and shares Rs.9, 000; Purchase consideration: Rs.67, 000)

10.8 SUMMARY :
Partnership dissolves when the term of the partnership expires, or when the adventure completes,
or when any of the partners die or retire or insolvent. In all these cases, the partnership firm may continue
with the remaining partners. There is also a possibility of dissolution of partnership firm. When all the
partners agree, or any of the partners become insolvent, or when business becomes illegal or when
partnership has a will or when court orders; the partnership firm dissolves. In this lesson the accounting
procedure when a firm dissolves voluntarily are discussed. Further, the method of accounts when a firm
is sold to a joint stock company is also discussed.
Centre For Distance Education 10.26 Acharya Nagarjuna University

10.9 GLOSSARY :
Dissolution of partnership: Closure of the existing partnership relation among the partners is
called dissolution of partnership. The expiry of the term of duration, the completion of the adventure,
the death of a partner, the insolvency of a partner and the retirement of a partner lead to dissolution of
partnership.

Dissolution of partnership firm: It is the closure of the existing partnership firm after clearing
the assets and liabilities and closing down and settling the capital accounts of partners once for all.

Purchase Consideration: It is the value or compensation offered by the buying company to the
partnership firm for taking the firm into its fold. The consideration consists of cash or cash with shares
and debentures.

10.10 SELF ASSESSMENT QUESTIONS :

1. Distinguish between dissolution of partnership and dissolution of partnership firm.
2. Mention the accounting procedure when a joint stock company purchases a partnership firm.

Dr.R.Jayaprakash Reddy.
 LESSON - 11
PARTNERSHIP ACCOUNTS: V – INSOLVENCY
OBJECTIVES :
After going through the lesson, you will be able to understand the following:
1. Accounting method when a partner becomes insolvent.
2. Garner vs. Murray case.
3. Accounting procedure when all partners become insolvent.
4. Piece meal method of distribution after realization of assets.
STRUCTURE OF THE LESSON :
11.1 Insolvency – Introduction
11.2 Garner vs. Murray Case
11.3 When all partners are insolvent
11.4 Gradual realization of assets and piecemeal distribution
11.5 Illustrations
11.6 Try yourself
11.7 Summary
11.8 Glossary
11.9 Self Assessment Questions

11.1 INSOLVENCY – INTRODUCTION :

Whenever any partner in the partnership firm becomes insolvent, the firm dissolves and the
burden of the insolvent partner should be borne by the solvent partners in their profit sharing ratio. As
usual, a realization account needs to be prepared and the loss or profit that comes out of it should be
transferred to the partners. The debit balance of the insolvent partner should be transferred to the debit
side of the solvent partners in their respective profit sharing ratio and thus the accounts of all partners
will be closed. This is a usual practice to be adopted. But after the case of Garner vs. Murray, the
method of bearing the burden of insolvent partner had changed. In this lesson, we discuss the accounting
procedure before and after this case and also the case when all partners become insolvent. Finally, the
piece meal distribution method of the sale proceeds when a partnership firm dissolves is also discussed.

11.2 GARNER VS. MURRAY CASE :

When a partner becomes insolvent, he may not be in a position to pay the amount owed by him
to the firm in full. The amount not so paid is a loss to the firm. This loss has to be borne by the solvent
partners. Generally, they share in their profit sharing ratio. This was the procedure used to be adopted
before Garner vs. Murray case. The Garner vs. Murray case gave a new look regarding sharing the loss
of the insolvent partner. The case says the following points:
1. The solvent partners should bring in cash their share of loss on realization.
2. The loss on account of insolvency of a partner should then be borne by the solvent partners in
the ratio of their capitals after bringing in cash such loss on realization.
Centre For Distance Education 11.2 Acharya Nagarjuna University

According to this case, the loss on account of insolvency of partner should be borne by the
solvent partners in the ratio of their capitals standing in the balance sheet, just before the
dissolution of the partnership firm.
In this connection, the following points should be noted :
1. The term capitals here mean the real capitals of the partners and not the capitals as maybe
standing in the books of the partnership firm in the names of different partners. This distinction
is particularly important when the partners are maintaining their capital accounts on fluctuating
capital system. The true capitals in case of this system will be ascertained after making all
adjustments regarding reserves, drawings, unrecorded assets on the date of the balance sheet,
just before dissolution of the partnership firm.
2. In case a partner, though solvent has a debit balance in his capital account, just before the
dissolution of the partnership firm, such a partner will not be required to bear the loss on account
of insolvency of a partner.

11.3 WHEN ALL PARTNERS ARE INSOLVENT :

If all the partners are insolvent then the creditors cannot expect to be paid in full. All the cash
available, together with whatever can be received from the private estates of all partners, will be paid
to the creditors after the expenses of realization are met. The Realisation Account should be prepared
in the usual course but creditors should not be transferred to this account nor will payment to creditors
be debited to this amount. The loss on realization should be transferred to the capital accounts of
partners in the profit-sharing ratio. The available cash should then be paid to the creditors. The amount
remaining unpaid should be transferred to Deficiency Account to which account the balances of
partners’ capital accounts should be transferred. Thus, the books will be closed.

11.4 GRADUAL REALIZATION OF ASSETS AND PIECEMEAL DISTRIBUTION :

In the previous lessons, it is assumed that all assets have been realised on the date of dissolution
and all liabilities have also been paid on that date. This assumption makes possible the ascertainment
of profit or loss on realization immediately. However, in actual practice, this does not happen. The
assets are sold gradually to realize the best price for them. Similarly, the liabilities are paid gradually
depending upon amount realised from the sale of the assets. Thus, the final profit or loss on realization
can be known only after the expiry of certain time when all assets are completely realised and all
liabilities completely paid off.
After payment of all outside liabilities and partners loans, the capitals of the partners are
returned. However, the amount payable to a partner on account of his capital cannot be ascertained,
unless the total profit or loss on realization is known. This means that the partners should not be paid
any amount till realization is complete. This may create financial problems for the partners, since on
the one hand the partnership business is being dissolved and on the other the partners do not get any
money from the firm to start a new business or to meet their expenses. Thus, the partners should not be
required to wait till realization is complete. They should be paid as and when the firm has funds left
with it after payment of all outside liabilities. This is called as piecemeal distribution of assets.
In dissolution, first of all the outside creditors have to be paid, then if surplus remains, any loans
given by the partners over and above their capitals are paid and last of all the partners’ capitals will be
paid off. It is clear, therefore, that any cash in hand or cash collected should be distributed among
creditors until all of them are paid off. It is to be remembered that sufficient funds for liabilities are to
be kept in hand for future contingencies like for bills discounted expected to be dishonoured.
Advanced Accounting 11.3 Partnership Accounts : V-Insolvency

Basis of distribution: As we know well, the profit or loss cannot be adjusted in the capital accounts
immediately. However, cash must be distributed in such a way that the amounts finally left unpaid (i.e.
the loss to be borne by the partners) are in the ratio in which profits and losses are shared. The available
cash cannot be distributed according to the profit sharing ratio (unless the capitals are themselves in the
profit sharing ratio) because that will leave the balances unpaid out of proportion. The cash available
cannot also be distributed in the ratio of capitals because, and then the partners will be forced to bear
the final loss in the ratio of capitals which may be different from the profit sharing ratio.
11.5 ILLUSTRATIONS :
Illustration 1 :
Partners A, B and C share profits in the ratio of 2:1:2 respectively on 31 st March 2007. They
decided to dissolve the partnership. The Balance Sheet as on that date is given below:
Liabilities Assets
Sundry Creditors 40,000Balance in Bank 4,000
Capitals: Other assets 3, 96,000
A 1, 60,000
B 1, 60,000
C 40,000
4, 00,000 4, 00,000
The assets realized Rs.2, 40, 000 only, and realization expenses were Rs.10, 000. C has been
declared insolvent. C has no assets other than the capital stated above.
Show the capital accounts of the partners, before and after the decision of Garner vs. Murray.
Solution:
Realisation Account
To Other assets 3, 96,000 By Creditors 40,000 To Cash – expenses 10,000 By Cash
2, 40,000
To cash – creditors 40,000 By Realisation – loss:
A 66,400
B 33,200
C 66,400 1, 66,000
4, 46,000 4, 46,000

Before Garner vs. Murray case:

A’s Capital Account
To Realisation – loss 66,400 By Balance 1, 60,000
To C’s Capital 17,600
To Cash 76,000
Centre For Distance Education 11.4 Acharya Nagarjuna University

1, 60,000 1, 60,000
B’s Capital Account
To Realisation – loss 33,200 By Balance 1, 60,000
To C’s Capital 8,800
To Cash 1, 18,000
1, 60,000 1, 60,000
C’s Capital Account
To Realisation – loss 66,400 By Balance 40,000
By A’s Capital 17,600
By B’s Capital 8,800 26,400
(Profit sharing ratio: 2:1)
66,400 66,400
Cash Account
To Balance 4,000 By Realisation- exps. & liabilities 50,000
To Realisation 2, 40,000 By A’s Capital 76,000
By B’s Capital 1, 18,000
2, 44,000 2, 44,000
After Garner vs. Murray case:
A’s Capital Account
To Realisation A/C 66,400 By Balance 1, 60,000
To C’s Capital 13,200 By Cash (nominal entry) 66,400
To Cash 1, 46,800
2, 26,400 2, 26,400
B’s Capital Account

To Realisation A/C 33,200 By Balance 1, 60,000

To C’s Capital 13,200 By Cash (nominal entry) 33,200
To Cash 1, 46,800
1, 93,200 1, 93,200
C’s Capital Account

To Realisation A/C 66,400 By Balance 40,000

By A’s Capital 13,200
By B’s Capital 13,200 26,400
66,400 66,400
Cash
Account
To Balance 4,000 By Realisation – Exps. & liabilities 50,000
Advanced Accounting 11.5 Partnership Accounts : V-Insolvency

To Realisation A/C 2, 40,000 By A’s Capital 1, 46,800

To A’s Capital (nominal) 66,400 By B’s Capital 1, 46,800
To B’s Capital (nominal) 33,200
3, 43,600 3, 43,600
Real Payment:
A: 1, 46,800 – 66,400 = 80,400 B:
1, 46,800 – 33,200 = 1, 13,600

Note:
Before Garner vs. Murray case – the debit balance of insolvent partner is shared by solvent partners in
their profit sharing ratio (2:1).
After the case – the debit balance of insolvent partner is to be shared by solvent partners in their final
capital ratio (after writing the entry for bringing their share of realization less cash) (1:1).
Illustration 2 :
The position of Rakesh, Rajeev and Ramesh on June 30, 2007 was as follows:
Sundry Creditors 25,000Cash 10,000
Rakesh Loan Account 16,000 Sundry Assets 68,000
Rakesh Capital 25,600 Ramesh Capital 31,200
Rajeev Capital 14,400
Profit and Loss A/C 28,000
1, 09,200 1, 09,200
Profits and losses are shared Rakesh 18/35; Rajeev 7/35. The firm is dissolved on the above
date. Sundry assets realize Rs.56, 000. Sundry creditors are paid Rs.24, 000 in full settlement.
Expenses amount to Rs.3, 200. Ramesh is insolvent.
Assume the capitals are not fixed. Close the books of the firm.
Solution:
Realisation Account
To Sundry Assets 68,000By Creditors A/C 25,200
To Cash – expenses 3,200 By Cash – expenses 56,000
To Cash – creditors 24,000 By Rakesh Capital 7,200
By Rajeev Capital 2,800
By Ramesh Capital 4,000 14,000
95,000 95,000
Rakesh Capital Account
To Realisation – loss 7,200 By Balance 25,600
To Ramesh Capital 18,133 By P & L A/C 14,400
Centre For Distance Education 11.6 Acharya Nagarjuna University

To Cash 21,867 By Cash 7,200

47,200 47,200
Rajeev Capital Account
To Realisation – loss 2,800 By Balance 14,400
To Ramesh Capital 9,067 By P & L A/C 5,600
To Cash 10,933By Cash 2,800
22,800 22,800
Ramesh Capital Account
To Balance 31,200By P & L A/C 8,000
To Realisation – loss 4,000 By Rakesh Capital 18,133
By Rajeev Capital 9,067 27,200
(Final Capital ratio)
35,200 35,200
Cash Account
To Balance 10,000 By Realisation – expenses 3,200
To Realisation – assets 56,000 By Realisation – creditors 24,000
To Rakesh Capital 7,200 By Rakesh Loan 16,000
To Rajeev Capital 2,800 By Rakesh Capital 21,867
By Rajeev Capital 10,933
76,000 76,000
Note: When a partner becomes insolvent, the formula in Garner vs. Murray case is to be applied. As per
that formula – a) the realization loss is to be shared to all partners; b) the solvent partners should bring
their share of realization less in cash; c) the debit balance in insolvent partner’s capital account should
be charged to solvent partners’ capital account in their final capital ratio.
Illustration 3 :
X, Y and Z were in partnership sharing profits and losses in the ratio of 1/5, 3/10 and ½. The
following is their Balance Sheet as on 30th June 2007 when they decided to dissolve:
Liabilities Assets
X Capital 3,000 Cash 1,000
Y Capital 4,000 Plant and Machinery 5,000
Z Capital 3,000 Sundry Debtors 20,000
Trade Creditors 12,000 Advance to X 2,000
Loan from Bank on book debts, plant etc. 14,000 Loss to date 8,000
36,000 36,000
The assets realized Rs.20, 000. X has private estate which is valued at Rs.4, 000. Y is insolvent.
From Z’s estate a dividend of 50 paise in a rupee is received.
Advanced Accounting 11.7 Partnership Accounts : V-Insolvency

Show the Realisation Account and the accounts of the partners assuming that all entries relating
to dissolution are passed through the Realisation Account.
Solution:
Realisation Account
To Plant 5,000 By Loan from Bank 14,000
To Sundry Debtors 20,000 By Creditors 12,000
To advance to X 2,000 By Cash – assets 20,000
Advance to X 2,000 22,000
By X Capital 1,000
To Cash – loan 14,000 By Y Capital 1,500
- Creditors 12,000 26,000 By Z Capital 2,500 5,000

53,000 53,000
Cash Account
To Balance 1,000 By Realisation – liabilities 26,000
To Realisation – assets 22,000
To X Capital 1,250
To Z Capital 1,750
26,000 26,000
X Capital Account
To Realisation – loss 1,000 By Balance 3,000
To P & L A/C 1,600 By Cash (Bal. Fig) 1,250
To Z Capital 750
To Y Capital 900
4,250 4,250
Y Capital Account
To Realisation – loss 1,500By Balance 4,000
To P & L A/C 2,400By X Capital 900
To Z Capital 1,000
4,900 4,900
Z Capital Account
To Realisation – loss 2,500 By Balance 3,000
To P & L A/C 4,000By Cash 1,750
By X Capital 750
By Y Capital 1,000 1,750
6,500 6,500
Centre For Distance Education 11.8 Acharya Nagarjuna University

Note: First Z capital account was settled as his capital is showing a debit balance. It was transferred to
capitals of X and Y in their capitals ratio 3:4. Then Y capital account debit balance was transferred to
X capital Account. The necessary cash was then brought in by X.
Illustration 4 :
The Balance Sheet of O, P, Q, and R showed the following position on dissolution.
Balance Sheet
Liabilities Assets
Creditors 10,000 Cash at Bank 34,000
O’s Capital 15,000 Q’s Capital 10,000
P’s Capital 10,000 R’s Capital 3,000
Profit on Realisation 12,000
47,000 47,000
Show the final adjustments among the partners assuming that R is insolvent.
Solution:
Realisation Account
To O’s Capital 3,000 By Balance B/D 12,000
To P’s Capital 3,000
To Q’s Capital 3,000
To R’s Capital 3,000
12,000 12,000
Creditors’ Account
To Cash 10,000 By Balance B/D 10,000
10,000 10,000
O’s Capital Account
To Cash 18,000By Balance B/D 15,000
By Realisation A/C 3,000
18,000 18,000
P’s Capital Account
To Cash 13,000 By Balance B/D 10,000
By Realisation A/C 3,000
13,000 13,000
Q’s Capital Account
To Balance B/D 10,000 By Realisation A/C 3,000
By Cash 7,000
10,000 10,000
Advanced Accounting 11.9 Partnership Accounts : V-Insolvency

R’s Capital Account

To Balance B/D 3,000 By Realisation A/C 3,000
3,000 Cash 3,000
Account

To Balance B/D 34,000 By Creditors A/C 10,000

To Q’s Capital A/C 7,000 By O’s Capital A/C 18,000
By P’s Capital A/C 13,000
41,000 41,000
Illustration 5 :
P, Q, R and S were partners sharing profits and losses in the ratio of 3:3:2:2.
Following was their Balance Sheet as on 30th June 2007.
Liabilities Assets
Sundry Creditors 15,500Cash at bank 2,000
P’s Loan 10,000 Sundry debtors 16,000
Capital Accounts: Less: Provision 50015,500
P 20,000 Stock 10,000
Q 15,000 35,000Furniture and fittings 4,000
Trade marks 7,000
Capital Accounts:
R 16,000
S 6,00022,000
60,500 60,500
On 30th June, 2007 the firm was dissolved and Q was appointed to realize the assets and pay off
the liabilities. He was appointed to receive 5% commission on the amounts finally paid to other partners
as capital. He was to bear the expenses of realization. The assets realized as followed.
Study debtors 11,000 Stock 8,000
Furniture and fittings 1,000 Trade marks 4,000
Creditors were paid off in full, in addition a contingent liability for bills receivable discounted
materialized to the extent of Rs.2, 500. Also there was a joint life policy for Rs.30, 000. This was
surrendered for Rs.3, 000. Expenses of realization amounted to Rs.500. R was insolvent but Rs.3, 700
were recovered from his estate.
Write up the necessary accounts to close the books of the firm.
Solution:
Realisation Account
To Debtors 16,000 By Reserve for bad debts 500
To Stock 10,000 By Creditors 15,500
Centre For Distance Education 11.10 Acharya Nagarjuna University

To Furniture 4,000 By Cash – Debtors 11,000

To Trade marks 7,000 Stock 8,000
To Cash – Creditors 15,500 Furniture 1,000
Discounted bill 2,500 18,000 Trademarks 4,000
Policy 3,000 27,000
By Realisation – loss:
By P’s Capital A/C 3,600
By Q’s Capital A/C 3,600
By R’s Capital A/C 2,400

By S’s Capital A/C 2,400 12,000

55,000 55,000
P’s Loan Account
To Cash 10,000By Balance B/D 10,000
10,000 10,000
P’s Capital Account
To Realisation A/C – loss 3,600 By Balance B/D 20,000
To R’s Capital A/C 8,400 By Cash (nominal entry) 3,600
To Q’s Capital – commission 381
To Cash 11,219
23,000 23,000
Q’s Capital Account
To Realisation A/C –loss 3,600By Balance B/D 15,000
To R’s Capital A/C 6,300 By Cash (nominal entry) 3,600
To Cash – expenses 500By P’s Capital – commission 381
To Cash 8,581 (8,000 x 5/105)
18,981 18,981
R’s Capital Account
To Balance B/D 16,000By Cash 3,700
To Realisation A/C –loss 2,400 By P’s Capital 8,400
By R’s Capital 6,300 14,700
18,400 18,400
S’s Capital Account
To Balance B/D 6,000By Cash 8,400
Advanced Accounting 11.11 Partnership Accounts : V-Insolvency

To Realisation – loss 2,400

8,400 Cash 8,400
Account

To Balance B/D 2,000 By Realisation – liabilities 18,000

To Realisation A/C 27,000By P’s Loan 10,000
To R’s Capital A/C 3,700 By Q’s Capital – expenses 500
To S’s Capital A/C 8,400 By P’s Capital (11,210 – 3,600) 11,219
To P’s Capital (nominal entry) 3,600 By Q’s Capital (8,581 – 3,600) 8,581
48,300 48,300
Note: S’s Capital account shows debit balance, but he is not insolvent. He brings in the necessary cash.
R is insolvent. His debit balance charged to P and Q in their final capital ratio i.e. after writing the entry
for bringing their loss of realization in cash. But really any partner, who is solvent, does not bring cash
for the realization loss. A notional entry will be written for bringing cash. Therefore the actual amount
payable to P comes to Rs.8, 000 (20,000-3,600+8,400). On this amount, the commission to Q is to be
calculated. If calculation is made as 5/100 on 8, 000, P does not get Rs.8, 000. So calculation shall be
5/105 on 8, 000. The commission is to be chargeable to P as the realization account and other partners’
capital accounts were already closed.
It is assumed that expenses of realization were paid first by the firm, and then they were charged
to Q, who has to bear them.
Illustration 6 :
A, B and C are partners in a business sharing profits equally. Their Balance Sheet at 31 st March
2007 is as follows:
Liabilities Assets
Sundry Creditors 10,000 Furniture 2,100
Bills payable 2,000 Stock 15,400
Capital Accounts: Sundry debtors 18,000

A 12,000 Less: Provision 90017,100

B 9,000 C’s Current Account 5,000
C 1,000 22,000Cash in hand 1,400

Current Accounts:
A 2,000
B 2,000 3,000
41,000 41,000
C is insolvent and his estate pays Rs.1, 800 to the firm. The partnership is consequently
dissolved and sundry debtors, stock and furniture realize Rs.23, 600. Sundry creditors are settled at
Rs.8, 000. You are required to prepare the necessary ledger accounts to close the books of the firm in
accordance with the decision in Garner vs. Murray.
Centre For Distance Education 11.12 Acharya Nagarjuna University

Solution :
Realisation Account
To Furniture 2,100 By Reserve for bad debts 900
To Stock 15,400 By Creditors 10,000
To Debtors 18,000 By Bills payable 2,000
To Cash – creditors 8,000 By Cash – assets realized 23,600
- bills payable2,000 10,000By A’s Current A/C 3,000
By B’s Current A/C 3,000
By C’s Current A/C 3,000 9,000
45,500 45,500
A’s Current Account
To Realisation A/C 3,000By Balance 2,000
To C’s Capital A/c 2,400 By Reserve fund 1,000

(4/7th share of C’s deficiency) By Cash 3,000

To A’s Capital A/C – transfer 600
6,000 6,000
B’s Current Account
To Realisation A/C 3,000 By Balance 2,000

To C’s Capital A/C(3/7th share) 1,800 By Reserve fund 1,000

To B’s Capital – transfer 1,200
6,000 6,000
C’s Current Account
To Balance 5,000 By Reserve fund 1,000
To Realisation A/C 3,000 By C’s Capital A/C – transfer 7,000

8,000 8,000
A’s Capital Account
To Cash 12,600 By Balance 12,000
By Current A/C 600
12,600 12,600
B’s Capital Account
To Cash 10,200By Balance 9,000
By Current A/C 1,200
10,200 10,200
C’s Capital Account
To Current A/C 7,000 By Balance 1,000
Advanced Accounting 11.13 Partnership Accounts : V-Insolvency

By Cash – brought in 1,800

By A’s Current A/C (4/7th share) 2,400

By B’s Current A/C (3/7th share) 1,800

7,000 Cash 7,000
Account

To Balance 1,400 By Realisation – liabilities 10,000

To Realisation – assets 23,600 By A’s Capital A/C 12,600
To A’s Current A/C – loss brought in 3,000 By B’s Capital A/C 10,200
To B’s Current A/C – loss brought in 3,000
To C’s Capital A/C – loss brought in 1,800

32,800 32,800
Note: In the case of Garner vs. Murray, the solvent partners have to bring their share of realization loss
in cash before sharing the deficiency caused by the insolvency of one of the partners. But when the
partners have current accounts in addition to their capital accounts, they need not bring the loss in cash,
as it makes no difference even if it is not brought in.
When there are current accounts the following procedure is to be followed:
1) Insolvent partner’s current account balance is to be transferred to his capital account.
2) Debit balance of his capital account is to be charged to the current account of other solvent
partners in their capital ratio.
3) Current account balances of solvent partners to be transferred to respective capital accounts and
the final payment are to be made.
Insolvency of all Partners:
Illustration 7:
Kalyan and Krishna are equal partners. Their Balance Sheet stood as under:
Liabilities Assets
Kalyan’s Capital 6,000Plant and Machinery 13,750
Creditors 39,000Furniture 5,000
Debtors 5,000
Stock 6,250
Cash at bank 3,000
Krishna’s drawings 12,000
45,000 45,000
The partnership was dissolved and the assets were realised as follows:
Stock Rs.3, 500; Furniture Rs.3, 000; Debtors Rs.5, 000; Machinery Rs.6, 000;
Centre For Distance Education 11.14 Acharya Nagarjuna University

The cost of collecting and distributing the estate amounted to Rs.1, 500. Kalyan’s private estate
is not sufficient even to pay his private debts, whereas in Krishna’s private estate there is a surplus of
Rs.500.
Prepare Realisation account, cash account and profit and loss account and creditors’ account
showing dividend payable to creditors.
Solution:
Realisation Account
To Plant and Machinery 13,750By Cash – Stock 3,500
To Furniture 5,000 - Furniture 3,000
To Debtors 5,000 - Machinery 6,000
To Stock 6,250 - Debtors 5,000 17,500
To Cash – expenses 1,500 By Kalyan Capital A/C 7, 000
By Krishna Capital A/C7, 00014,000
31,500 31,500
Creditors Account

To Cash A/C 19,500 By Balance 39,000

To Deficiency (or P & L A/C) 19,500

39,000 39,000
Cash Account
To Balance 3,000 By Realisation A/C 1,500
To Realisation A/C 17,500 By Creditors 19,500
To Krishna’s Capital 500
21,000 21,000
Kalyan’s Capital Account
To Realisation A/C 7,000 By Balance 6,000
By Deficiency (or P & L A/C) 1,000
7,000 7,000
Krishna’s Capital Account

To Balance 12,000By Cash 500

To Realisation A/C 7,000By Deficiency (or P & L A/C) 18,500
19,000 19,000
Deficiency Account (P & L A/C)
To Kalyan’s Capital A/C 1,000 By Creditors A/C 19,500
To Krishna’s Capital A/C 18,500
19,500 19,500
Advanced Accounting 11.15 Partnership Accounts : V-Insolvency

Note: When all partners became insolvent, the creditors need not be transferred to realization account.
In such case the realization account shall be utilized only for the assets and expenses.
Illustration 8 :
Below is the Balance Sheet of A, B and C as on December 31, 2007.
Liabilities Assets
Sundry creditors 40,000 Cash 1,000
A’s Loan 10,000 Stock 24,000
Capital Accounts: Debtors 20,000
A 5,000 Furniture 3,000
B 3,000 8,000 C’s Capital overdrawn 10,000
58,000 58,000
Due to the inability to pay the creditors, the firm is dissolved. B and C cannot pay anything. A
can contribute only Rs.1, 500 from his private estate. Stock realises Rs.15, 000. Debtors realize Rs.16,
000 and furniture is sold for Rs.1, 000. Expenses amounted to Rs.3, 000. Prepare accounts to close the
books of the firm.
Solution :
Realisation Account
To Stock 24,000 By Cash – assets 32,000
To Debtors 20,000 By A’s Capital – loss 6,000
To Furniture 3,000 By B’s Capital – loss 6,000
To Cash – expenses 3,000 By C’s Capital – loss 6,000
50,000 50,000
Creditors Accounts
To Cash 31,500 By Balance B/D 40,000
To Deficiency A/C 8,500
40,000 40,000
A’s Loan Account
To Deficiency A/C 10,000 By Balance B/D 10,000
10,000 10,000
A’s Capital Account
To Realisation A/C – loss 6,000 By Balance B/D 5,000
To Deficiency A/C 500 By Cash 1,500
6,500 6,500
B’s Capital Account
To Realisation A/C - loss 6,000 By Balance B/D 3,000
By Deficiency A/C 3,000
Centre For Distance Education 11.16 Acharya Nagarjuna University

6,000 6,000
C’s Capital Account
To Balance B/D 10,000 By Deficiency A/C 16,000
To Realisation A/C – loss 6,000
16,000 16,000
Cash Account
To Balance B/D 1,000By Realisation A/C 3,000
To Realisation A/C 32,000By Creditors A/C 31,500
To A’s Capital A/C 1,500

34,500 34,500
Deficiency Account
To B’s Capital A/C 3,000 By Creditors A/C 8,500
To C’s Capital A/C 16,000 By A’s Loan A/C 10,000
By A’s Capital A/C 500
19,000 19,000
Note: When all partners become insolvent, the firm becomes unable to pay the creditors in full. In such
cases the creditors should not be transferred to Realisation account. As the creditors are not satisfied
fully the question of payment of A’s loan does not arise and that loan shall be transferable to Deficiency
account.
Gradual or Piecemeal Distribution :
Illustration 9 :
Moon, Light and Shade were partners sharing profits in the ratio 4:3:1. They want to dissolve
the firm from the following Balance Sheet as on 31st March 2007.

Balance Sheet 31-12-2007

Liabilities Assets
Creditors 2,625 Sundry Assets 18,500
Bank Overdraft 875
Capital Accounts:
Moon 7,000
Light 3,000
Shade 5,000 15,000
18,500 18,500
Capital should be repaid whenever the assets realised. Firm’s assets realised as follows:
May 2,000
Advanced Accounting 11.17 Partnership Accounts : V-Insolvency

July 1,500
September 2,500
October 4,000
December 6,500
No additional amount was realised.
From the above Balance Sheet and other information prepare the statement showing the interim
distribution of cash.
Solution:
Statement showing the distribution of cash
Particulars Creditors OD Moon Light Shade
Balances 2,625 875 7,000 3,000 5,000
Less: Receipts in May (3:1) 1,500 500 — — —
1,125 375 7,000 3,000 5,000
Less: Receipts in July (3:1) 1,125 375 — — —
— — 7,000 3,000 5,000
Less: Receipts in September — — — — 2,500
— — 7,0003,000 2,500
Less: Receipts in October — — — — 750
— — 7,000 3,000 1,750

Remaining (4,000-750) to Moon &

Shade in 4:1 ratio — — 2,600 — 650
— — 4,400 3,000 1,100
Less: Receipts in December ( 500 in

6,500 to Moon and Shade in 4:1ratio) — — 400 — 100

— — 4,000 3,000 1,000
Remaining 6,000 in 4:3:1 ratio — — 3,000 2,250 750
Partners’ share in loss (4:3:1) — — 1,000 750 250
Note: The liabilities are to be payable first. Creditors and overdraft were in the ratio of 3:1. Until they
are discharged completely the cash available is to be distributed between creditors and overdraft in the
ratio of 3:1. The amount available in the first two instalments is sufficient to discharge the liabilities.
The cash realised in the subsequent instalments is to be distributed to the partners so as to bring
their capitals in to their profit sharing ratio. It will enable the partners to suffer the loss on realization
(which can be known only at the end of last instalment) in their profit sharing ratio.
Working Notes:
Total book value of assets 18,500
Less: Assets realised in 16,500
instalments
Centre For Distance Education 11.18 Acharya Nagarjuna University

Loss on Realisation 2,000

Moon’s share 2,000 x 4/8 1,000
Light’s share 2,000 x 3/8 750
Shade’s share 2,000 x 250
1/8
Cash Account
May To 2,000 May By Creditors 1,500
Realisation
A/C
July To 1,500 By Overdraft 500
Realisation
A/C
Sept. To 2,500 July By Creditors 1,125
Realisation
A/C
Oct To 4,000 By Overdraft 375
Realisation
A/C
Dec To 6,500 Sept. By Shade 2,500
Realisation Capital
A/C
October By Moon 2,600
Capital
By Shade 1,400
Capital
Dec. By Moon 3,400
Capital
By Light 2,250
Capital
By Shade 850
Capital
16,500
16,500
Moon’s Capital Account
Oct. To Cash 2,600 By Balance 7,000
B/D
Dec. To Cash 3,400
To 1,000
Realisation
A/C
7,000 7,000
Light’s Capital Account
Dec. To Cash 2,250By Balance 3,000
B/D
To 750
Realisation
A/C
3,000 3,000
Shade’s Capital Account
Advanced Accounting 11.19 Partnership Accounts : V-Insolvency

Sep. To Cash 2,500By Balance 5,000

B/D
Oct. To Cash 1,400
Dec. To Cash 850
To 250
Realisation
A/C
5,000 5,000
Creditor’s Account
May To Cash 1,500By Balance 2,625
B/D
July To Cash 1,125
2,625 2,625
Overdraft Account
May To Cash 500By Balance B/D 875
July To Cash 375
875 875
11.6 TRY YOURSELF :
1. A, B and C were equal partners. On 31st December, 2007, their position was as follows:
A’s Capital 2,000Cash 1,500
B’s Capital 600 C’s Capital 200
Loss on Realisation 900
2,600 2,600
C is insolvent and can pay nothing. Close the books of the firm ignoring the decision in Garner
vs. Murray.
(A gets Rs.1, 450 and B gets Rs.50)
2. The following is the balance sheet of a firm as on 31st December 2007, when D has become
insolvent:

Balance Sheet as on 31st December, 2007

Liabilities Assets
Sundry Creditors 10,000Sundry Assets 50,000
General Reserve 10,000 C’s Capital A/C 10,000
A’s Capital A/C 30,000 D’s Capital A/C 10,000
B’s Capital A/C 20,000
70,000 70,000
The assets realised Rs.40, 000. Creditors are paid in full. Partners share profits and losses
equally. You are required to close the books of the firm applying Garner vs. Murray rule.
(D’s deficiency Rs.7,500; A’s share Rs.4, 432 and B’s share Rs.3,068; Finally A gets Rs.26, 590 and B
gets Rs.18, 410)
Centre For Distance Education 11.20 Acharya Nagarjuna University

3. A, B and C were partners in a firm. They shared profits and losses in 40%, 30%, and
30%respectively. The firm was dissolved and B was appointed to realize assets and distribute the
proceeds. B is to receive 5% commission on the amounts realized from sale of assets and to bear all
expenses of realization. The Balance Sheet on the date of dissolution was as under:
Liabilities Assets

Creditors 17,700Cash 450

A’s Capital 9,000Debtors 13,650
B’s Capital 6,000Less: Provision 750 12,900
Stock 18,000
C’s Capital overdrawn 1,350
32,700 32,700
Debtors realized Rs.10, 500; stock Rs.13, 500; goodwill Rs.600. Creditors were paid Rs.17,
250 in full settlement. In addition, outstanding creditors Rs.150 and expenses Rs.180 paid by B. A and
B agreed to receive Rs.900 in full settlement from C.
Show the Realisation Account, Cash Account and Capital Accounts of the partners.
(Loss on Realisation: A- Rs.2,892; B- Rs.2,169; C- Rs.2,169; A gets Rs.7,428 and B gets Rs. Rs.6,003)
4. Ram and Shyam were in equal partnership. Their Balance Sheet stood as under on 31 st December,
2007 when the firm was dissolved.
Creditors 3,200Machinery and Plant 1,200
Ram’s Capital 400Furniture 300
Debtors 500
Stock 400
Cash 180
Shyam’s drawings 1,020

3,600 3,600
The assets realised as under:
Machinery 600 Furniture 100
Debtors 400 Stock 300
The expenses of realization amounted to Rs.140. Ram’s private estate is not sufficient even to
pay his private debts, whereas in Shyam’s private estate there is a surplus of Rs.140 only.
Give accounts to close the books of the firm.
(Profit on Realisation: Ram – Rs.240; Shyam – Rs.240; Deficiency Rs.1, 450)
5. A, B and C carried on business as partners, sharing profits and losses in the ratio of 3:4:5. They
decided to dissolve the partnership as on 1st July, 2007 and agreed that the sale of the assets should
not be forced but should be made gradually. As the realization was not likely to be completed for
over a year and as the partners wished the receipts from sales to be dealt with as and when received,
you are asked to prepare a scheme for the equitable distribution of such receipts.
The following was the Balance Sheet of the firm at the date of dissolution:
Liabilities Assets
Advanced Accounting 11.21 Partnership Accounts : V-Insolvency

Creditors 10,000 Sundry Assets 36,000

B’s Loan Account Capital 2,000
Accounts:

A 12,000
B 8,000
C 4,000 24,000
36,000 36,000
The net amounts realised from the gradual sale of assets were as follows:
1st Instalment 5,000
2nd Instalment 10,000
3rd Instalment 5,100 4th Instalment
6,300
5th Instalment 5,700
Draw up a detailed statement showing the distribution of each instalment received and the final
settlement.
( In II instalment A gets Rs.3,000; In III installent A gets Rs.3,900 and B Rs.1,200; In IV instalment A
gets Rs.2,700; B Rs.3,600; In V instalment A gets Rs.1,425; B Rs.1,900 and C Rs.2,375)
11.7 SUMMARY :
Insolvency of a partner, Insolvency of all partners and distribution of the proceeds among the
partners are discussed in this lesson at length along with their accounting procedures. Garner vs. Murray
case and method of distribution of loss among the solvent partners and final settlement are also
discussed with suitable accounting problems. Finally, in this lesson, the piecemeal method of
distribution of proceeds of assets among partners is discussed.
11.8 GLOSSARY :
Garner vs. Murray case: Under this case - first, the solvent partners should bring in cash equal
to their share of the loss on realisation and second – the loss due to the insolvency of a partner should
be divided among the other partners in the ratio of capitals then standing.

11.9 SELF ASSESSMENT QUESTIONS :

1. Explain the peculiarities of Garner vs. Murray case with an illustration.
2. Explain the procedure of accounting and distribution of proceeds of assets among the partners and
creditors under piecemeal distribution.

Dr. R. Jayaprakash Reddy.